Buyers wary of losing out with long-term-care insurance

The saddest lesson of recent years for the U.S. middle class is that those who "do the right thing" are first in line to get hammered.

You devote a lifetime to a single employer, only to get laid off with a cheeseparing severance package. You finance your own retirement by religiously funding your 401(k), and Wall Street lays an egg on your head.

Here's a lesson baby boomers are just beginning to learn: You pay for long-term-care insurance for years, even decades, then your insurance company changes the rules.

Consider Marvin and Joan Klotz, of Los Angeles, retired employees of the state university system, who purchased a long-term-care policy for Joan from the California Public Employees' Retirement System, or CalPERS, in 1997, when she was 61.

Their goal was to shoulder some of the burden of their own late-in-life needs. The policy was to pay up to $120 a day in nursing-home care, $60 for an assisted-living facility or $1,800 a month for home care. The figures were to increase with inflation and the money would keep flowing for Joan's lifetime. The annual premium was $1,656.

Since 2004, CalPERS has raised the premium three times, with the latest increase to take effect this year. That will bring the cost to $3,365, or 103 percent higher than where it started.

CalPERS says that if Joan elects to keep her lifetime benefit and inflation protection, the charge will keep rising at least 5 percent a year thereafter.

"It strikes me as outrageous," said Marvin Klotz, 81, a former English professor. He said CalPERS never promised not to raise rates but did say the inflation provision would not cost extra.

Given that the inflation factor is 5 percent a year and the premium will keep rising by that amount, it seems as if CalPERS is sticking its customers with the inflation risk it had promised to absorb.

This sort of thing has made the long-term-care market look like the Wild West of the insurance business.

"The more complicated a product is, the harder it is to regulate," says Kansas Insurance Commissioner Sandy Praeger, who heads the health-insurance committee of the National Association of Insurance Commissioners. "And these are very complicated."

The first thing to keep in mind is that long-term-care insurance is unique. Typically you start paying premiums years, even decades, in advance of when you expect to claim benefits, and you have to keep paying to keep the policy alive.

While it's true you also pay premiums for life insurance well in advance of when you expect to need it, you know from the outset how much your heirs will collect, and the insurer knows how far off, on average, that moment will be.

One relatively new wrinkle is the rise of assisted-living facilities, which were uncommon in the 1980s.

The most common problem has been mispricing. Through the 1990s, insurers set rates low to drum up business and failed to keep adequate reserves against their risks. They threw in lifetime benefits and inflation protection as come-ons, only to discover these were "problematic, because they didn't know how to price the risks," says Bonnie Burns of California Health Advocates, a Medicare advocacy group.

The insurers assumed, correctly, that regulators would wave rate increases through or allow for reductions in benefits to keep customers from being abandoned outright. But as Burns notes, when a premium increase is implemented many years after a policy originates, it may fall hard on customers who are already retired and on fixed incomes.