The traditional long-term care insurance market has undergone something of a mass exodus in recent years. There used to be over 100 companies offering long-term care insurance, and now there are only about twelve, with more leaving every day. This is unfortunate, as the baby boomers are reaching a point in their lives where long-term care insurance would be a smart purchase. Many elderly Americans will need some type of long-term care in the future, so why have so many companies left the market? We’ll take a look at that, and at CalPERS (California Public Employees’ Retirement System) long-term care insurance in particular.
History of Long-Term Care Insurance
Back in the 1990’s, long-term care insurance was the next big thing, as far as insurance goes. It seemed to make sense—protect your nest egg by buying insurance in case you need such care in your golden years. Companies priced these policies based on their limited knowledge of long-term care. Some of the things that they failed to take into account included:
- More people were going to keep their LTC insurance instead of letting it lapse
- Rising costs of long-term care which have outpaced inflation
- People are living longer and sometimes need long-term care for a longer period of time
- Low interest rates hurt investor portfolios
- They assumed customers would not want to enter nursing homes, even if they had LTC insurance
They priced these policies lower than they should have, to be attractive to consumers and to be competitive (remember, there were over a hundred companies offering this insurance).
When they realized their pricing errors, not to mention the fact that insurance companies were losing money on this insurance, they adapted. They increased rates. They increased rates so much—often by as much as 80% or 90%, that customers were infuriated.
Imagine you purchased a long-term care policy in 2000. You knew long-term care might be an eventuality for you and your spouse, as you were both in your early 50’s. Your premiums were a very comfortable $100 a month for the two of you. You felt you had prepared for the future.
Fast forward to 2015. Your insurance company sends you a letter, saying rates are going up. This comes as a surprise, as you had originally purchased inflation protection. Now rates are increasing by a lot—80%, so now your premiums are going to be $325 a month. You can’t afford this, and this increase comes at a terrible time, just when you and your spouse are in your early ‘70’s and increasingly likely to need long-term care. You had to decide whether you were going to struggle to pay the premiums to let the policy lapse.
Many customers filed class-action lawsuits, which is what happened to CalPERS.
This is one of the main reasons why many companies stop offering traditional long-term care insurance. And more companies are now offering hybrid long-term care insurance product, which is a combination of life and long-term care insurance.
CalPERS Long-Term Care insurance
CalPERS sold about 150,000 traditional long-term care insurance policies, starting in 1995. They marketed these policies as being 30% cheaper than the competition and said this was possible due to their management of such policies and investment returns. That was an exaggeration.
CalPERS long-term care insurance plan was grossly underfunded. They tried to compensate by seeking out risky investments, but those resulted in more losses.
In 2012, they raised rates by 85%, although they split the increase over two years, 2015 and 2016. Policyholders asserted that this was a breach of contract, as they had been told that their rates would never rise if they bought the inflation protection.
If the courts find for those plaintiffs, CalPERS could lose as much as $1.2 billion dollars in damages.
Why Did CalPERS Stop Offering Long-Term Care Insurance?
As of June 17, 2020 CalPERS will no longer be selling long-term care insurance. Applications that were still in process will not be approved.
They still manage pensions, retirement benefits and health care for public employees in the state of California. It’s the nations’ largest public pension fund, with more than 2 million members in the retirement system and 1.5 million members in the health program.
Due to the pandemic and other reasons, CalPERS lost about $67 billion dollars between January and March of 2020. This put even more pressure on them to make better investments and recoup their losses.
To get themselves out of the hole that they found themselves in, CalPERS is thinking of getting into banking, focusing on private equity and private debt. Another thing of concern about CalPERS is that they might have violated the Bagley-Keene Open Meeting Act, as they discussed all of this behind closed doors. There is also some concern that private equity and private debt are extremely risky ventures and this is a particularly terrible time to invest in them.
In August, Ben Meng abruptly left his position as investment chief, amid accusations that he sought investments that benefited him personally rather than the company and its investors.
Any way you look at it, CalPERS is in flux financially. They have leveraged funds they shouldn’t be leveraging and investing in possibly high-risk ventures. They need to meet a 7% gain every year, or residents of California will be forced to pay more in taxes to make sure that CalPERS can meet its financial obligations. We could go on and on about CalPERS and their financial outlook—it’s fascinating. They’re not alone in abandoning long-term care insurance, and we anticipate more companies getting out of this business in the future, due to the losses it incurs. It’s too bad, but for long-term care insurance to be profitable, it would be priced so high that no one could afford it.