The trend towards long-term care insurance product standardization and simplification may have taken a ‘hit’ recently. Without naming names let me address and frame this issue. In the early 2000’s California passed an extensive long-term care insurance reform bill (SB870) which added a number of different provisions to the California Insurance Code (CIC). One of the lesser recognized but important changes to long-term care insurance brought about by this law is how an insurance company must calculate the benefit increases (5% simple or compounded) on the LTCi pool of money (benefit pool) after the insured goes on claim. CIC ‘10237.4(c) reads as follows:
The inflation protection benefit increases under a policy or certificate that contains an inflation protection feature shall not be reduced due to the payment of claims.
Up until recently this has been interpreted as follows: An insured purchases a policy with a $365,000 benefit pool of money ($200 per day, five year benefit period) with a 5% compounded inflation rider. The benefit pool increases annually (beginning in the second policy year) by a 5% compounded inflation factor before and during the claim. Let’s assume for a moment that when our hypothetical insured qualifies for benefits; (1) their pool is worth $1,000,000; (2) that their claim begins on the anniversary date of their policy, and (3) after one year they use $200,000 of their benefit pool. Regardless of the of the fact that their benefit pool is now only $800,000 on the next anniversary of the policy the company would add $50,000 to the benefit pool ($1,000,000 x 5%) as if the claim never had occurred. This is a substantial advantage to the consumer since, under the older calculation method, the company would only increase the pool by $40,000 ($800,000 x 5%); a $10,000 difference. As the claim proceeds and the pool decreases further this difference can amount to a great deal of money.
One insurance company that recently re-introduced their product series into the California marketplace was able to convince the Department of Insurance that what we all thought was black and white is really gray or as one of our famous past-Presidents stated under oath, ‘it all depends on what is is’. This new notion of what we thought was established law, or reversion to a bygone method of benefit increase calculation provides this company with a 5% to 6% premium savings. Not much in my book considering the potential for lost future benefits. However, far be it for me to read the minds of home office actuaries, legal eagles and regulators.
The result of this retro-interpretation means that agents again have to beware of product variations that we thought were a thing of past and be mindful of the fact that unless they properly explain this nuance to consumers that they might face an errors & omissions suit sometime in their future. It still behooves the agent and consumer to beware.
To its credit, John Hancock is not trying to hide this change. In fact, at recent product introductory meetings they were open in disclosing this modification. However, I am not sure how many in attendance were aware of the significance of this alteration or understood its implications.
In my opinion, we ought to have a level playing field for long-term care insurance products in this state. If the California Department of Insurance is comfortable with its new interpretation of CIC ‘ 10237.4(c), then they ought to allow those long-term care insurance companies, who wish, to re-file their products accordingly. If they are not willing to do this in an expeditious manner than they should require our unnamed company to cease and desist until they bring their product in-line with prevailing thought.
If you would like to know more about this issue, please contact your BJFIM/Paradigm marketing representative.
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