Q. My husband and I are seriously considering long-term care insurance. I read recently, however, that Penn Treaty is facing liquidation, and health insurers across the country are on the hook for hundreds of millions of dollars because of this. If the liquidation of one long-term care insurance company has such an effect on health insurance carriers, does it also affect other long-term care insurers and life insurance carriers, as well? Do you typically recommend long-term care insurance, and if so, or if not, what recommendations do you have?
A. Recently, as you mentioned, a good-size American long-term care insurance company, Penn Treaty, was ordered to liquidate and wind down its affairs. Its demise will orphan tens of thousands of policyholders — people who bought long-term-care insurance to protect their assets from catastrophic nursing home costs.
“Liquidation is rare, but it does happen in bunches sometimes,” said Robert Hunter, director of insurance for the Consumer Federation of America. The organization has been warning about problems with long-term-care insurance since the early 1990s.
How can this happen? In many cases, companies underestimate the true cost of coverage and are struggling now to make good on all their promises. “There is definitely talk in the street that it’s still a high-risk situation for quite a few companies,” Hunter said. “It’s not a healthy situation.”
In most cases, however, an insurer in a similar situation will quietly find a buyer, and policyholders may not know what happened, or care, as long as their claims are paid.
Policies Will Pay Some Amount, Even if An Insurer Liquidates
Each state has a guarantee fund to rescue policyholders in insurance failures. The funds pay people’s claims, up to a predetermined limit that varies by state.
A few states cap guarantee-fund relief at $100,000. Others, such as California and Connecticut, guarantee up to $500,000 and more. New Jersey is said to have no limit at all, but some analysts question that promise, especially if another big long-term-care insurer fails.
How does it work? In liquidation, the policies will be canceled, and the guarantee fund will take care of a certain dollar amount worth of claims. For some though, it will not be enough, and they will suffer a loss, and may not be able to buy coverage to replace what they lost.
Liquidation Makes LTC Insurance and Health Insurance Premiums Go Up, But Not Life Insurance Premiums
Traditional long-term care insurance is a type of health insurance, so in situations such as this where a long-term care company liquidates, both long-term care insurers and health insurers are liable for the guaranteed payments. This will almost certainly result in increased future premiums. Life insurance companies, which also offer long-term care benefits, are not affected.
When it comes to Penn Treaty, industry analysts estimate the parent company has long-term claims liabilities approaching $4 billion, but only about $700 million in assets. Therefore, Penn Treaty’s liquidation will pose a “potential shock to the health marketplace.” Companies will try to pass it on in some way to policyholders, by imposing premium surcharges on customers, or they can shift the burden to taxpayers by paying less in state premium taxes.
Anthem Inc., the nation’s second-largest health insurer, estimates it will pay $253.8 million to cover its portion of Penn Treaty claims. Anthem said last month, “(p)ayment of the assessments will be largely recovered through premium billing surcharges and premium tax credits over future years.” Aetna, the industry’s third-largest insurer, expects to pay $231 million. And Blue Shield of California has booked a loss of nearly $41 million. Those numbers may rise as Penn Treaty’s policyholders collect on their benefits.
Some health insurers may impose surcharges of up to 2% annually over several years to cover Penn Treaty assessments — one more unwelcome charge tacked onto the country’s growing health tab.
Asset-Based Long-Term-Care Hybrid Coverage is Recommended
Traditional long-term-care insurance is particularly expensive and frequently its purchase comes at a time when people are facing retirement and looking for ways to cut back. One way to avoid spending a lot of money directly on a long-term-care policy while still getting its benefits is to buy a hybrid insurance policy.
As you may know, I offer specialized elder-focused financial planning services through Lifecare Financial Services, a company I started over 10 years ago. Among our offerings are hybrid products such as annuities and life insurance policies that provide a long-term care benefit which is much less risky than the traditional long-term care insurance described above. The appeal of these hybrid products is that you are guaranteed to receive the benefits you pay for, and these products are typically much easier to qualify for than traditional long-term care insurance.
These hybrid products can:
- pay for some or all your long-term care costs should you need care •provide you with income or provide your estate with a tax-free life insurance benefit should you not need care •offer you a 100% money-back guarantee should you change your mind
Who should consider hybrid policies?
A hybrid life insurance policy with long-term care benefit may be worthwhile for you to consider if you have liquid assets, especially tax-qualified assets such as IRA funds, that you probably will not need for retirement income.
For example, you may have already set aside $500,000 in your savings, should you need long term care. Let’s presume you are a 60-year-old female. As an alternative to self-funding your needs, you could choose to move $250,000 of the $500,000 in your savings into a linked-benefit policy. In doing so, you could possibly receive benefits such as:
- a $507,000 tax-free life insurance benefit to your beneficiaries should you not need long-term care; or • up to $10,140 per month tax–free for 50 months (or if less money is needed, you can take it out over longer period of time up to the maximum of $507,000) to pay for Home Health Care, Assisted Living, or Nursing Home Care; or •your entire premium of $250,000 returned to you should you change your mind. •Plus, for a small additional annual premium, you might be able to qualify for an unlimited long-term rider that will pay you up to $10,140 per month tax–free for the rest of your life.
The above is just an example, and not financial advice. Actual premiums for any specific individual are based on age and health and other factors.
The pros of hybrid policies are as follows:
- The underwriting is usually less stringent than for a conventional long-term care policy. Genworth, for example, asks applicants whether they have or have had some serious illnesses like cancer, but the company often doesn’t require a physical, and less serious ailments don’t affect insurability at all. People as old as 80 may be able to buy these policies, even with as little as a $50,000 initial investment.
- Most policies have few restrictions on how you use the money. Once you meet the qualifications, usually the inability to manage two of the six activities of daily living (eating, bathing, dressing, toileting, transferring and maintaining continence) or a serious cognitive impairment, how you spend your money is up to you. You can pay a neighbor or a family member to help out or use the tax-free payments to augment other money that you have available.
- If you are in a high tax bracket even post retirement, getting the money tax-free could make a big difference in the amount you have to spend.
- The annuity and your long-term-care insurance are fully funded. Once the plan is in place, you don’t have to pay anymore (unless you qualify for and elect a lifetime rider).
Talk to Us First
If you have done your research and decide that long-term care financial planning may be a good fit for you and your family, you should first meet with an experienced Elder Law Attorney, such as myself, who also does elder-focused financial planning, in order to understand all of your options. Hybrid financial products provide numerous options, but there are also dozens of other long-term care asset protection strategies, including the Living Trust Plus™ Medicaid Asset Protection Trust, Veteran’s Aid and Attendance Benefits (for eligible Veterans and their spouses), and Medicaid Planning.
To discuss the strategies listed above further, or if you have not done long-term care planning, estate planning, or incapacity planning (or had your planning documents reviewed in the past several years), please call us to make an appointment for a consultation:
Fairfax Medicaid Planning: 703-691-1888
Fredericksburg Medicaid Planning: 540-479-1435
Rockville Medicaid Planning: 301-519-8041
DC Medicaid Planning: 202-587-2797
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About Evan H Farr, CELA, CAP
