Increasing Costs Of Long Term Care

Executive Summary:

Long Term Care expenses are high and seem to be increasing each year. It’s an expense that is difficult to deal with, and certainly not a fun topic of discussion. However, some people have bought LTC insurance.

In this episode, we will discuss the LTC policy of one particular person who recently received a letter outlining a price increase. The price of his existing policy is going up 98%!

No matter how you look at it, this is ridiculous. In this episode we will discuss this situation and whether or not the client should keep his policy.

Spoiler Alert!: He keeps the policy

Watch Video Version:

Podcast Transcript

Daniel Wendol 0:00
Hey, Tony, I got a letter. Well, my client got a letter from his long term care insurance company. It’s so outrageous, I have to read it to you. Okay, it’s long. But here’s one snippet from it. Tell me what you think. This is a letter from his existing long term care insurance carrier. Here we go. “If you are comfortable with your current level of coverage, pay the increase premium when you received your next bill. If we don’t hear from you by such and such a date, the first phase of this 98.1% rate increase will take effect.” Let me repeat that. “The first phase of this 98.1% rate increase will take effect.” What do you think of that?

Wow, 98% rate increase.

Let’s talk about it.

Hello, and welcome to another Dolphin Financial Radio show with me Dan Wendol, owner of Dolphin Financial Group. Alongside me today is Tony Shore and we’re going to be talking about a situation that many people are facing with their long term care insurance policies. In particular, I highlighted one, Tony, I read you, what did you think of that? The 98.1% rate increase from my client.

Tony Shore 2:39
I know that one time I worked for this company, and they brought in the insurance carrier for our health insurance and they said there is going to be a 20% rate increase basically, over last year’s costs, because our group had too many claims. So then I looked up the company on the internet and they had a $1.2 billion record surplus that year. So even though our one company may have cost them a little more money that year, I wasn’t feeling too sorry for them. And I was outraged. And people in that company were outraged by a 20% rate increase, because that’s a lot. Really. In one year 20%. I mean, you know, we get worried if inflation increases at a rate of 3% on the cost of goods, but health insurance costs can be outrageous, like 10% or whatever. But 98%! When you showed that to me, I didn’t believe you. I thought this is from The Onion or this is made up. This has to be a joke.

Daniel Wendol 3:48
No, I wish it was. You know, this is something that the long term care insurance industry has been dealing with for years. In fact, it’s still probably going to continue to happen because it’s just…let’s talk about it. Let’s talk about why these long term care insurance costs are skyrocketing. And this is an industry thing. This was a big company- Genworth. A few years, but prior to that John Hancock announced it and then John Hancock has subsequently has pulled out of the market, they don’t sell it anymore. A couple of the big name companies just stop selling this. So let’s talk about first of all, what are we talking about here – long term care insurance. A lot of people don’t have it, but they’re thinking about it. And long term care insurance is designed to pay for a nursing home or assisted living facility or a home health care aide to come and help you if you need that help. So rather than shell money out to go to the nursing home, when you’re older, you would use this insurance the insurance would cover it or at least a portion of it. And so people bought these with the expectation that they would cover future expenses. And when they were purchased, the industry got it wrong. The actuaries, the geeks behind the numbers, totally got it wrong. I mean, miserably wrong. They didn’t expect people to use it and keep it as long as they have. So what happened is they sold these long term care policies, and the clients kept them and they’re starting to use them. They’re actually going to long term care facilities, and they’re using the insurance and they didn’t expect that to happen.

Tony Shore 5:34
Right. So well, what does that tell you? Let me stop you right there, Dan. Okay, so the insurance company sells policies, counting on people never using them and then what happened is, people actually started using them because all the baby boomers, record numbers of people, 10,000 a day or some crazy thing, are retiring and getting older and needing long term care. Which is outrageously expensive. But these people, some of them bought long term care insurance to cover all those costs. And then once people started using the policies, the insurance company go, “whoa, whoa, wait a minute. We gave you the policy, but we never expected you to use it.” Is that what you’re saying?

Daniel Wendol 6:19
Well, kind of. Let’s talk about something that everyone has, or hopefully has, is auto insurance. Imagine an auto insurance company starts selling a bunch of policies, and they sell them cheaper than the rest of the market. Everyone buys it from this company, because it’s cheaper. And then all of a sudden, there’s this panic that leads to a bunch of car accidents. Something happened. Some weird situation where, you know, many more people are getting in car accidents than they anticipate, for whatever reason.

Tony Shore 6:51
There’s a number of ice storms and the roads freeze over and there’s a lot of accidents.

Daniel Wendol 6:56
Right. Let’s say let’s say ice formed on bridges in Florida. So that would be a really weird anomaly. And Lord knows, we don’t know how to drive around here as it is, you throw some ice on the roads in Florida, there’s gonna be a lot of accidents. All of a sudden, there’s a whole bunch of claims. Now the insurance company is saying, well, we only expect one claim a week. Now we’re getting one claim a day. We don’t have the money for this, the money that everyone’s paying is supposed to cover this, but we just don’t have enough people paying. So that’s the problem. That’s the problem they’re facing. And with auto insurance, the actuaries have it down to a science, you know, they know how many accidents people going to get on average, right? But the long term care, it was so new, they didn’t really know. They didn’t have data. They didn’t know how many of these policies people were going to use and so forth. And that’s what’s happening now. The industry totally messed it up. It’s totally their fault. They got it wrong.

So they can’t just raise their pricing. Well, they can. But they can’t just raise that pricing without getting permission from the state insurance commissioners. So what happens is these long term care companies go to the state Insurance Commission and say, “Hey, we kind of screwed up here. We need to increase our rates by 4% this year.” And the insurance commissioner says, “tough luck, buddy.” And that’s what a lot of them have done. They say, “Yeah, you’re doing fine. I see your balance sheet, you’re not in trouble. We need you to be in trouble first, before we will approve this rate.” And so they say “all right”, and then they go back the next year. “Well, we asked before last year, we need another 4% can we get like 7% this year?” And the Insurance Commission says “no, you seem to be perfectly fine.” And what happened is Genworth in particular lost a ton of money, billions of dollars. So finally, the insurance commissioners were like, “all right, you suffered enough. We’ll let you raise the rates.” And that’s what happened. So now they get this 98, literally, 98% increase that this guy got. He’s asking me, what do I do? But this is going to be phased in over a three year period. So 2018, 2019, and 2020. So it’s not like, overnight, but it basically is. So who’s paying for it? The insureds are paying for it…for the mistake of the insurance company? The insurance company lost the money, but who is paying?

It’s always the consumers and the insured that pay.

Right. But here’s what the insurance commissioners are dealing with- Do we let this company go bankrupt? Because they simply can’t afford it? And then who’s really going to lose out there? You know, all the people that have been paying. Or do we let them raise their costs and try and stabilize this thing? And so that’s what they choose. So no one wins here. No one. And the real, the real reason if we want to really say why are these price increases happening is because they were underpriced to begin with. So not to defend the insurance companies at all, but the people that bought these policies years ago got a really, really good deal. And now they’re trying to play catch up.

Right. And I would assume that what’s going to drive that the reason that company would either have to stop carrying long term care or go out of business is that, a lot of folks, once they get that 98% increase might have to just write it off and say, “Well, I can’t pay that.”

Right. So what do you do? And that’s what we’ll talk about today. What are the options? And they give you a ton of options, but a lot of people will drop it right? So now all future premiums, all costs that they were going to put into it are no longer there. So the insurance company doesn’t have that revenue to pay for the people that decide to keep it. So it’s a spiral, right? Yeah, a death spiral.

Tony Shore 10:47
The problem with long term care insurance in general, and I think you’ve mentioned this on the show before…the problem that consumers have with it is costly and then you can’t get that money back? The insurance company goes under or decides they’re going to raise the rate 98%….all that money you’ve paid into this point, if you never need long term care number one, that money isn’t in an account where you can, you know, utilize it at any point, right?

Daniel Wendol 11:26
Well, there is some non-forfeiture clauses in these insurance policies, meaning you don’t just lose what you put into it, they’ll, they’ll limit it to what you put in. So it’s not thrown away. What what really bothers people about long term care insurance in particular, is it’s like auto insurance. If you are never in an accident, you don’t get a refund. You don’t get your money back. So if you never use your long term care policy because you’re healthy, all that money you paid for insurance never gets realized, and tyou can’t pass it on to your kids.

Tony Shore 12:02
Right? That was my point.

Daniel Wendol 12:04
So you feel like you’re throwing money away for something that you hope you never use. But then again, well, you got to make sure you understand why you’re buying it.

Tony Shore 12:14
Because you can’t afford $100,000 a year for long term care out of your own pocket typically.

Daniel Wendol 12:21
Right, right. So that’s true insurance. You’re passing the risk on to the insurance company, but you pay for that. What’s happened is everyone was paying for it, but they were paying peanuts on the real cost and the insurance companies are now trying to catch up. I think the idea of I don’t want to pay for something I may never use…that’s what’s really caused, coupled with these ridiculous price increases, has caused the long term care insurance industry to basically disappear. The amount of long term care insurance policies that are sold today are a fraction of what was sold 10 years ago, 15 years ago. I mean, it’s just night and day. So people aren’t buying these things anymore. That doesn’t help the insurance companies. And plus the insurance companies don’t even sell it anymore because they realize, oh, man, we screwed that up. I’m not going to touch that again. So we got to wait for them to get it right.

But the question remains, what do you do now? What is my client to do? And so what he did is, what all my clients do, is they call me up and say, Dan, what do I do with this? I didn’t sell him this policy. It’s not like, “Hey Dan, what did you sell me here? Why did I get this?” He bought this years ago. But my job, because I’m looking out for my clients, is I have to go and sit here with him and figure it out. What do we want to do? We’ve got to make a decision here. And it’s a big decision. So let’s go a little bit further. And, you know, what happened with Genworth in particular, this was not just Florida, there’s I think 20 other states where they have these really large price increases. I think it was like average of like, 60% price increases. Florida is 98%. That’s rough. I can’t sugarcoat it. But, it turns out, Cliff Notes here, spoiler alert, my client is keeping this policy and he’s paying in full. He’s keeping it. Why? What’s he getting for it?

Genworth created a website for this. So you can go online and read all your options. They know this is an issue and they explain why it’s happening. And then they say, here are your options. They go into detail on it. They have an entire website dedicated to this issue, because it’s a big issue. Right? Talk about a PR nightmare, right?

Tony Shore 14:48
Yeah, they’ve got to be reeling too, because they’ve got to know that’s outrageous and ludicrous. So I imagine that they’re trying to, you know, they have to try to deal with it or cushion that blow somehow. But but aren’t there other, and I don’t want to get us off track but, as far as paying for long term care in general, versus the long term care policies which you say a lot of them are almost non existent, and they don’t offer as many. But there are other options that you can do. If you plan ahead to help cover long term care costs, right. There are strategies using other products where your money isn’t a loss, like, can’t you get a long term care rider on a fixed indexed annuity that will really help?

Daniel Wendol 15:33
Yeah, you can, there are other options. I did that video, if anyone wants to go to YouTube and look for “Four Different Ways To Pay For Long-term Care,” video. And one of them is what you’re talking about. That’s hybrid insurance. You can add a rider to an annuity. You can add a rider to a life insurance policy, which is becoming much more popular. In fact, I think that’s the new Long Term Care Insurance solution. I think less people are buying the standalone traditional Long Term Care Insurance and they’re buying a life insurance policy that will go to their beneficiary if they die, but if they don’t die, and they need long term care, they use the death benefit on themselves. I think people like that a lot more.

That sounds like a good option. And I know you weren’t, that’s not the direction you were headed as far as other options. But why did your client choose the option to go ahead with it and pay the 98% increase rate?

There are a couple of reasons. He has options. So let me just run through the quick options with you and then I’ll tell you why we chose to keep the current coverage. So he’s keeping it as is. That’s the first option. Pay the piper. Just pay and keep it. So that’s what he decided to do. The other option is you can decrease, you can adjust your coverage. So you can lower the amount of benefits you get. If you lower the amount of benefits you get, the insurance companies have to payout less when you need it, so they’re willing to lower the cost for you. So that’s one option.

You can also reduce the amount of time that you would be covered. So for him, he’s got lifetime benefits. Normally now they limit you to five years. Usually it’s like three to five years. So you could say, instead of getting lifetime benefits, I’m going to lower it to five years, I only get paid for five years. And then after that, you don’t have any more coverage, right?

You can reduce the waiting period. It’s technically called the elimination period. And that’s the length of time you have to wait before you can actually start using the insurance. So you might go into a nursing home, but your insurance won’t start until 90 days out. So you have to pay for the first 90 days, like a deductible, right? You can lower that to 30 days if you want. You can raise it to 180. So if you say I’m going to pay the first six months then the cost for insurance goes down because they realize they don’t have to pay until six months in. The average nursing home stay is less than three years. So they’re trying to figure it out, hey, if you’re gonna pay for the first six months, that’s less, we’re gonna have to pay out.

My client has an inflation protection rider – 5% increase. So his benefit is increasing 5% every year, compounding. So that’s keeping up with the cost of nursing home. You can say I’m going to buy a nursing home that will pay $100,000 a year right now. But in 30 years that nursing home might cost $200,000 a year. So you buy the inflation protection. You can reduce the inflation from 5% to 3% or 0%, eliminate the inflation rider, that’ll lower your cost. We we decided not to do that either with him.

And finally, like you mentioned, I put this money in can I get that back? They do have non forfeiture clauses like a lump sum, what you put in, they say we’ll pay that out. So you put in so far since you’ve owned it, $38,000. We’re going to give you a policy…you stop paying now, no more cost to you…and when you need it we’ll pay for your nursing home up to $38,000 a benefit. So you get that back. Again though if you never use it, it’s gone. Right? So those are the options, right?

With my client, here’s why we decided to keep it. If you ever going to buy one, you do a cost benefit analysis. How much am I going to pay right now? How much have I paid so far? What are the price increases going to be because there’s going to be another one right? They didn’t get it right the first time. Genworth had a policy increase four years ago, of like 30% and now it’s a 98%. So it’s not like they got it right yet. So you’re going to expect it to increase. You have to kind of guess as to what you’re going to be paying in the future. And then you have to guess when you might need this and how much benefit am I going to get? So you say, here’s what I’m putting in, here’s the benefit Im going to get out, is it worth keeping? And for my client, since he’s got this huge inflation protection, he’s got a huge benefit. I mean, his benefit is extremely high, but so was the cost. What happens is he’s going to have a lifetime benefits. So he figures you know, what if I stay for 10 years, what if I have dementia or something like that? Where I’m physically healthy, but I’m just not all there and I need someone to help me. That could go on for 10 years or more. So he’s done the math and said, this benefit is huge. It’s worth it to him.

Not to mention Tony, something else, which is very important, which you wouldn’t know unless you know the client, is he doesn’t have any kids. He doesn’t have a spouse. Okay, no spouse, no kids. His mother was my oldest client. She died at age 101. So he was taking care of her. She didn’t have insurance. He took care of her to the end, like full on nursing home, full on care. She was unable to do anything. And she had, she didn’t even know who he was at the end. So he’s seeing that and saying, well, who’s going to do that for me? And no one will. So he’s gonna have to pay someone to do it. So he’s like, this is this is my long term care policy. This is my life in the future. And he doesn’t have enough assets to do it himself. So that’s why he’s keeping it.

Tony Shore 21:30
And I guess that makes sense. You have to look at all those different scenarios. And you have to know the person and what you just did right there, Dan, is you made a case for why it’s crazy to think that you could not have a financial advisor or use a robo advisor, because you have to have somebody with the analytical knowledge and mind and financial expertise in advising people that know you personally. These types of choices are huge. And it does depend on your situation, and your unique challenges, and, you know, thoughts and desires all these things. You can’t get that through a computer. And it’s hard to do on your own. So I think that just makes sense. I mean, that whole story illustrates why it’s so crucial. We all have plans in place. And we look at all the options. So I’m glad we’re going over these options today.

Daniel Wendol 22:30
And that’s just it. You can’t just look at it in a bubble. You can’t just silo this. A lot of financial people that say, I’m going to advise you when it comes to long term care say- I don’t know. I’m not an insurance agent. What do I know about that?

I’m just investing your money in stocks.

Right? Or I need new health insurance. What should I do? I don’t know- talk to an insurance agent. And that’s okay. But you should be a quarterback you need someone to coordinate this if you’re not really financially astute yourself. So when my client says Hey, what should I do? I’m not going to say well go talk to your insurance agent…who’s probably dead or out of the industry already, right? I mean, right? Let’s face it, he bought it 15 years ago, who knows if that guy’s around? So he comes to me because I’m willing to help him with that. But I know it. I have an insurance background. I’m not afraid of insurance. I’m not gung ho about insurance. It’s tough to be when a company is doing something like this, it’s kind of tough to represent them, I’m sure.

I’m willing to look at both sides and say, let’s figure this out. What’s in your best interest? Put the financial planning hat on and say, let’s figure out what do we want to do. Let’s let’s look at the big picture. I mean, you can’t just ignore it. You can’t just say that’s not my wheelhouse. Bring in an expert, bring in someone you know, but if you don’t have that, at least your advisor should be willing to find one. I agree with you there. There’s no way you can look at this and just say what to do without knowing the client. Most people would say 98% increase!? See you later, I’m out. Which would have been a bad decision for him. Now, next time he gets a price increase, we’ll revisit it because maybe things will change at that point. But you have to keep on top of this stuff.

Same thing with these universal life policies. I rant on those. We’ve done shows on the same things happening with those. They’re blowing up in people’s faces because they were poorly designed from the beginning. Just like this long term care insurance. The poor design on life insurance is due to the agent. The poor design on this long term care is due to the actuaries of the insurance company, but either way, the clients are the one taking the heat, and someone needs to advocate for them. So you have to be proactive about it. If you have a long term care policy, look at it. Don’t just wait for that letter to show up. Look at it, call them up. Know your benefits. Talk to someone. Talk to your financial planner, get them to help you with it before it becomes a surprise. I have a feeling a lot of listeners out there…if they’ve listening to this show made it this far…they’ve they’ve experienced it in some way. Either their friend has or is thinking about long term care insurance. All I can say is look at your options. And you mentioned, Tony, that hybrid insurance is really become more popular.

Yeah, it has and it’s good to know that there are other options out there. Is there anything else you want to talk about before we have to go today, Dan?

As I always say, there are a lot of options out there but don’t throw the baby out with the bathwater just because you have an old policy. Don’t just get rid of it. You know, a lot of insurance agents will come in and say oh, that’s crap. Let’s get rid of it. We’re going to get you this one. Maybe not. This guy’s got a policy they don’t even make anymore. You know, it’s easy to just throw it away and say get something new. But you can’t find this anymore. The benefits are so rich. You have to be careful that you don’t get bamboozled into throwing something away that’s good. Just in the in the in the name of coming up with something new and better. It’s not always better, just because it’s new. So keep that in mind. If you’re interested in talking about your situation, give me a call or go to DolphinFinancialGroup.com. Go online to YouTube and watch the videos I do on this if you want more info. I talk specifically about long term care insurance. I talk specifically about imploding life insurance. That’s the best way to do it otherwise, Tony, you thought I was playing a joke on you, but that was real. This was a real letter.

Tony Shore 26:12
98% increase!

Daniel Wendol 26:15
I’m going to put that on Twitter and blast it around and see what the rest of the world thinks of it.

Tony Shore 26:20
Well, boy, I know I’d be…they’d might have to revive me if I’d been sent that letter. It’s like, get the smelling salts out. Well, Dan, great show today. A good topic. It’s something we need to think about need to look at these options. If our listeners are out there saying, hey, I’d like Dan to look over my insurance policies or see where my situations at. I know you’re offering a complimentary strategy session or consultation. How do they get ahold of you?

Daniel Wendol 26:48
Yeah, I always look at people’s old stuff. No problem with it. I kind of enjoy it. And I’ll tell you whether or not it’s good to keep or not. Just give me a call 8885085 935 or go to DolphinFinancialGroup.com.

Thanks for listening to Dolphin Financial Radio