The long & the short of long-term care insurance


By Randy Neumann

Long-term care insurance carriers have received a lot of negative attention in the press.  The John Hancock Life and Health Insurance Co. asked regulators in New Jersey and other states for a 40% increase last fall.  Being a policyholder, I received a letter of explanation, read it and understood it; unlike  Rep. Frank Pallone Jr. of Monmouth County, who, on Sept. 24, 2010, sent out a press release stating that he would be launching a probe into the double-digit rate hikes for long-term care insurance.
The easy route for a politician is to bash insurance companies, which is a common occurrence today.  The White House mounted a stinging, sustained broadside against health insurance company rate increases in March of this year as part of its health care program.  President Obama and his aides staged a two-pronged attack with a stern letter to the health insurance chief executives and a speech in which the President castigated insurance companies 22 times.  “How much higher do premiums have to rise,” he demanded, “before we do something about it?”
Obama’s business experience before being elected to the Senate was that of a “community organizer” and a law professor. Pallone practiced law before being elected to Congress.  Neither would be considered “heavyweights” in the business world, yet they are the elected officials who conduct the government’s business.
Let’s look at the history of long-term care insurance.  It’s not that long.  Although it began in the 1970s, it really didn’t catch on until the late 1980s.  At that time, only a handful of insurers offered long-term care insurance.  During the 1980s, additional options for long-term care began to emerge.  Assisted-living communities became more popular, and many people found themselves on long waiting lists because there weren’t enough facilities to meet the demand.
As a result, the free market system kicked into gear, more facilities were built, and they began to offer graduated care, which made real sense.  A person could live in a facility and receive varied degrees of care.  Although this is all great stuff, it is very expensive.
Simply stated, insurance companies underpriced the risk.  What can they do now?  They cannot arbitrarily raise the premiums on their existing policies.  Instead, they have to petition the state insurance departments to increase the rates on their various “books of business.”  In order to get rate increases, they must prove that their costs have gone up.
Interestingly, this was always the way insurance companies conducted business, and it worked very well.  However, we now have a different situation.  The government, as evidenced by the policies carried on by Messrs.  Obama and Pallone, wants to have a bigger role in telling insurance companies how to run their business.
It would be a fair assessment that based on the federal debt and deficit, the federal government is not very good at running a business, yet it is becoming more involved in all of our businesses.
In my humble opinion, the federal government should leave the current situation intact where the insurance industry is regulated by the states.  After I received my letter from John Hancock explaining the 40% rate hike, I was thankful that I had purchased an underpriced policy and had saved premium dollars over the years.  I sent a letter to my clients who had purchased a similar policy and told them my thoughts on the subject.
I have some personal experience with insurance carriers in turmoil.
After a 10-year boxing career during the 1970s, during which I was recognized as the No. 9 heavyweight in the world and No. 6 in the United States, and there were other heavyweights by the name of Ali, Frazier, Foreman, Norton, Young, et. al., I was appointed branch manager of the Garden State National Bank in my hometown of Cliffside Park.  Following a brief stint at the bank, I joined the fledgling financial planning industry in 1979.
Because the Glass-Steagall legislation – passed during the Great Depression and based on the belief that the banks, brokerage houses and insurance companies colluded to cause the market crash of 1929 – was still in force, I had to join separate companies to provide clients with both insurance and investment products.
The insurance company I joined was Mutual Benefit Life, based in Newark.  Not only was it an excellent company, it was the nation’s 19th largest life insurer.  However, because of the mismanagement of the senior officers, the company went into bankruptcy in 1991 (I had moved on during the mid-1980s; fortunately, I had learned how to duck in boxing).  The state regulators in New Jersey ordered Prudential and the other carriers in the state to circle the wagons and pick up the assets and liabilities of Mutual Benefit.  All annuitants and life insurance policyholders were made whole, and it did not cost taxpayers “one dime,” to quote the president.
What is the moral of the story?  Let the insurance companies compete in a free market as they always have and continue to be regulated by the states and not the Fed.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.  Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial.  Member FINRA/SIPC.  He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.

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