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Turbulence in Long-Term Care Insurance

Insurance against the inca-

pacities of advanced age

is a brilliant idea. Financial

advisers agree it should

be part of every family’s

financial plan. The problem

is that even after more than

30 years, providers of the

product have not been able

to price it properly.

Initially, companies in

the business made actuarial

assumptions that did not

survive the test of reality.

They were wrong about

client experience (people

smart enough to buy long-

term care insurance were

smart enough to maintain

their coverage), about life

expectancy (more people

are living longer into the

incapacity stage) and about

the value of reserves, which

has suffered unpredictable

and dramatic reductions in

recent years.

Thirty years ago, no one,

repeat no one, could have,

or did, predict that interest

rates would go to near zero

and remain there for at least

a decade. The insurance

business model is based

on collecting premiums,

aggregating these funds in

reserves and then obtain-

ing a 4- to 5-percent safe

return on U.S. bonds to

build reserves to pay future

claims. A decade of the

Federal Reserve’s low-rate

policy has smashed this

business plan.

The result is serious

under-pricing of long-term

care (LTC) policies. Many

companies—including the

likes of GE and American

Express—have entered and

left the business. Few com-

panies continue to offer this

product, and some of them

are in a weakened financial

condition. The problems are


Now comes the John

Hancock Life & Health Insur-

ance Co., the only insurer

willing to bid on the Office

of Personnel Management’s

LTC program, with a recently

negotiated contract with

OPM that continues the

federal LTC program, but

with huge price increases—

in some cases more than

double. Federal employee

policyholders and their

unions are outraged and

demanding action.

Here are the realities

with which these demands

will have to contend. First,

virtually all LTC policies

have seen their premiums

double in recent years. It is

not only federal employees

who are affected. It is always

problematic for public

sector unions to “demand”

benefits not available to

other citizens.

Second, the federal gov-

ernment can neither order

John Hancock to offer these

policies at a loss nor, indeed,

to remain in the business.

There is no “high govern-

ment official”—or congres-

sional committee, for that

matter—that can direct a

solution. Any changes will

have to be negotiated.

Third, there is a worst-

case scenario, and that is

that John Hancock simply

withdraws from the busi-

ness rather than renegotiat-

ing the deal with OPM. In

that case, barring a congres-

sional bailout (for which I

see no appetite on the Hill),

federal employees would be

faced with entering the open

market at their current ages.

That would probably involve

even higher outlays than

John Hancock proposes.

Well then, what is the

solution, however imper-

fect? First, maintain the

pressure on OPM and

John Hancock. Who knows

whether OPM actuaries got

the best deal available or

whether John Hancock has

some room for compro-


Second, LTC policies

have many variables (e.g.,

cost, length of coverage,

details of coverage, inflation

adjustments and other bells

and whistles). Moreover,

every individual family’s

needs are different. These

variables offer real scope for

policyholders to take a hard

look at costs and benefits as

applied individually.

I understand that John

Hancock and OPM have

offered individual counsel-

ing. As this is written, AFSA

is negotiating for such

counselors to come to our

headquarters to assist our

retired members who hold

these policies. Individual

adjustments may well be


Third, affected AFSA

members should check the

open markets in their states.

State insurance regulators

can make a positive dif-

ference. I am a Virginian,

and my LTC premium has


However, my LTC pro-

vider, Genworth Financial,

raised my rates sharply

in 2014. Under guidance

from the Virginia Bureau of

Insurance, the increase was

phased in over three years,

with no additional increases

until at least 2018. In other

words, the market in your

state may be more user-

friendly than the federal


It has become axiomatic

that we are entering a new

economic era. Turbulence,

the duration and details of

which we cannot know, will

be the norm. Gaining knowl-

edge of these changes and

patience and creativity in

dealing with them will be criti-

cal. The LTC situation is both

example and harbinger.





Views and opinions expressed in this column are solely those of the AFSA Retiree VP.


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