A Wall Street Journal recent article entitled “Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice”, discussed the recent trend of increases in rates for long term care insurance. The article discusses how many people were told that they would have level premiums to cover medical needs in the future. These consumers paid their premiums and kept their end of the bargain, only to be told that the insurance companies did not correctly estimate the costs and the risks.
This story is analogous to the recent trend in life insurance, where consumers were illustrated a premium stream at purchase. Later, when the insurance companies determined that they were not making the profit they had expected, they have sought to raise premiums after the fact to pass along this miscalculation to the insured.
This article quotes the president of Genworth Financial, Inc., a large seller of long term care insurance, as saying that the companies should never have priced the products as they did, and that the regulators should never have allowed it.
In both the life insurance and the long term care cases, consumers who believed what they were told, and paid their premiums, are now having the rug pulled out from under them. There were companies a decade ago who priced their policies correctly. These carriers suffered as consumers flocked to the more cheaply priced policies. Now the companies who priced the policies correctly do not need to change pricing, while those who undercut and mispriced policies are doing so.
This should not stand. If insurance companies, with scores of actuaries, price products incorrectly, they should stand by that pricing. When they are more profitable than expected, they don’t lower prices and give money back to the insured. Why should it work the other way?
Faced with this dilemma, American seniors must get creative about how to pay for long-term care or risk a major hit to their retirement funds.
The National Association of Insurance Commissioners (NAIC), the U.S. regulatory support organization created by the chief insurance regulators from all 50 states, formed a Long-Term Care Innovations Subgroup to study this issue. The group recently issued a report that identified some viable options for privately funding long-term care costs. Four specific options they laid out included the following:
• Single Premium Permanent Life Insurance Policies
• Annuity Long-Term Care Hybrid Policies
• Impaired-Risk Payout Annuities
• Life Settlements.
Of these long-term care financing options, a life settlement is the only one that does not involve seniors buying anything or spending any money out of their own pockets.
A life settlement is a proven strategy for generating cash from an unwanted or unaffordable life insurance policy. In a life settlement transaction, a senior sells his or her life insurance policy to a third-party investor for an immediate cash payment. The investor then takes over the premiums on the policy and collects the death benefit when the insured passes away.
About the Author:
Mr. Young is a Senior Managing Director at Vida Capital. In addition to his role at Vida, Mr. Young is an adjunct professor of Regulatory Law at the University of Texas Law School, Chairman of the Board of the Institutional Longevity Markets Association (ILMA), Board Member of the Life Insurance Settlements Association (LISA), a monthly blogger and a frequent speaker at life settlement industry conferences. Additionally, he serves as vice chairman of the Securities Law Committee of the State Bar of Texas’ Business Law Section. Prior to joining Vida Capital, Mr. Young was President & CEO of NFP Securities as well as New York Life’s Broker-dealer network and New York Life’s Registered Investment Adviser. He began his career as a clerk on the Third Circuit Court of Appeals before practicing at Cravath, Swaine & Moore in New York. Mr. Young holds multiple securities licenses (Series 7, 24 and 63) and insurance designations including Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Chartered Advisor for Senior Living (CASL). Mr. Young currently serves on the Board of Directors for the Austin Habitat for Humanity. He graduated from Stanford University with Honors and Distinction in 1989 and from the University of Chicago Law School with Honors in 1992.