Fee-Only Consulting on Long Term Care Insurance: What if the company that issued my policy fails?

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by John H. Robinson

The LTC insurance market has been in turmoil for more than a decade as insurance companies have come to the grim realization that the policies they issued in the 1990s and early 2000s were badly mispriced and that the proclivity of policyholders to make claims was grossly underestimated.

The resulting charges to the insurance companies have run into the billions of dollars and have caused many of the largest LTCI carriers to either exit the business or stop issuing new contracts. To stem the financial hemorrhaging, most of these companies have lobbied/begged state insurance regulators to allow premium increases ranging from 50%-400%(!) of the initial premium in order to stay solvent.

Such increases are a bitter pill for policyholders because many purchased the policies based upon the insurance salesman’s representation that their premiums would be fixed as long as the policy remained in force. As they have discovered, the contracts have a clause that permits the insurance companies to apply for premium hikes if they mispriced their products.

Long Term Care Insurance Consulting as My Fee-Only Side-Hustle

I have been providing fee-only consulting guidance to clients regarding the dreaded premium increase notifications for years.It has almost become a cottage industry for me since an article I wrote in 2020 went viral.   In most cases, the most palatable option is to accept no increase or a small increase in return for a reduction in benefits – most commonly by negotiating  a reduction/elimination of the inflation rider, reducing the daily benefit amount, or shortening the benefit period. 

These concessions are often a better option than terminating the policies and writing off the years of premiums paid. Typically, the contracts are still far less expensive than if they were to apply for coverage with a different carrier today, and, in many instances, the policyholders were originally sold more LTC coverage than was necessary for their objectives.

Most recently, however, I have received calls expressing concern not just about premium increases, but also about the possibility of the insurance carriers failing.  Most of these calls are arising from news pertaining to GE spinoff, Genworth, which, for many years, was the largest issuer of long term care insurance in the U.S. Genworth’s financial woes are well documented, and there is some anxiety among policyholders about the company’s future, particularly in the wake of the collapse of the company’s proposed $2.7 billion acquisition by China Oceanwide.  In September 2021, leading insurance company rating company A.M. Best lowered the its  financial strength rating for Genworth to C++ “Marginal.” Analytical website Macroaxis.com assigns a 51% probability of failure for the company in 2022.  That is obviously a bit unsettling for policy holders.

Consumer Protection Against Insurance Company Bankruptcy

So what happens if Genworth (or any other long term care insurance company) fails?  Long term care insurance, like life insurance (and other forms of consumer insurance), is regulated at the state level and is overseen by each state’s Insurance Commissioner. Each state has its own Guaranty Associations that are designed to support policyholders in the event of carrier failure.

Although the limits of coverage may vary from state to state, most states have adopted limits that are consistent with the National Association of Insurance Commissioners’ (NAIC) model. For long term care insurance, the NAIC limit is $300,000 in LTC policy benefits. Policyholders may check their own state’s guaranty association laws at the following link>

State Insurance Guaranty Associations Laws and Limits

Hawaii Life & Disability Insurance Guranty Association  – Frequently Asked Questions

Too Big to Fail?

As a practical matter, Long Term Care insurance company failures have been rare. In 2017, Penn Treaty, an smaller LTC player with 76,000 policyholders, fell into receivership and liquidation with assets of $468 million against liabilities of $4.6 billion!

In 2009, Conseco, a carrier with 140,000 policyholders, met a similar fate. At the end of the day, policyholders can take some modicum of comfort in knowing the limits of their state’s guaranty association benefits. The decision to terminate a policy into which thousands or even tens of thousands of dollars of premium have been paid is never an easy one.

The potential failure of Genworth, however, presents a very different challenge for the the state guaranty funds.  Genworth dominated the long term care insurance space and there is good reason for consumers (and state insurance commissioners) to worry about the solvency of the insurance guaranty funds. 

If you are looking for a reason as to why the state insurance commissioners seem to rubber stamp massive premium increase requests from Genworth, the potential financial ramifications of the company’s failure are likely the answer.  Although, in theory, one would think that the insurance commissioners should be protecting the interest of policy holders who paid premiums for many years, apparently the financial consequence of allowing Genworth to fail outweigh the interests of individual consumers.

Fortunately, there is some small solace for some Genworth policy holders.  A class action lawsuit – Skochin v. Genworth – offers policy holders two fully-paid up options that exempt them from future premium increases and still provide a (very) modest amount of ongoing coverage.

RELATED READING

What Happens When an Insurance Company Fails? (National Organization of Life & Health Insurance Guaranty Associations (NOLHGA))

Your Future Aches and Pains Are Killing GE (Bloomberg)

Options for Dealing with Rising Long-Term Care Insurance Premiums (Kiplinger)

Long-term care insurance safety net has huge holes (Benefits Pro)

John H. Robinson is the owner/founder of Financial Planning Hawaii and a co-founder of software-maker Nest Egg Guru. For more information visit Fee-OnlyPlanningHawaii.com.

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