My mother-in-law recently asked my husband to help her look into purchasing a long-term health care insurance policy.  Her financial advisor sent us a glossy brochure from the John Hancock financial services/insurance firm touting the benefits of a long-term health care policy.  The twist on this policy was that the Hancock firm was partnering with the state of New York, where my in-laws reside, to provide some sort of hybrid insurance policy.  As I understand it, under the policy, the Hancock firm would pay the insured’s nursing home expenses up to a capped amount for 3 years.  Afterwards, the insured individual would be able to qualify for some sort of Medicaid coverage from the state of New York, even if she still had assets that normally would have disqualified her for any Medicaid coverage.  The insured would still have to pay some of the costs of the long term care, along with Medicaid, but under this policy, she would not have to spend down all of her own assets first before qualifying for Medicaid.

Sounds alright at first glance, doesn’t it?  Well, I reread the John Hancock glossy brochure and found it lacking in any details about the policy.  It had some nice pictures showing elderly seniors happy and healthy and talked in generalities about not burdening your kids when you have to go into a nursing home, but it had no specifics on the following points:

• Inflation protection.  The policy would pay a certain dollar amount now, but does that dollar amount go up commensurate with inflation?  My mother-in-law is healthy and could easily go another 20 years before she actually has to enter a nursing home.  Undoubtedly, in the year 2028, nursing home costs will be much higher than today.
• Increases in insurance premiums.  The brochure says that at her age, my mother-in-law would need to pay about $2,500 per year in premiums.  Is that premium fixed or will the insurance company raise the premium?  When she retires, my mother-in-law will be on a fixed pension and social security.  There would be no room for her to absorb significant increases in premiums.
• Qualification for benefits under the policy:  How does the insurance company pay out benefits?  Does my mother-in-law have to be completely unable to care for herself at home?  Who makes the determination that she would need to enter a nursing home?  Is there a waiting period for benefits?
• Once the long-term care insurance policy pays out all benefits, when does Medicaid benefits kick in?  How much of the ensuing long term care costs would my mother-in-law be responsible for and how much would Medicaid pay?  Could she stay at the same nursing home or would she need to move to a Medicaid-approved (i.e., bottom of the barrel cheap) home?

There are many questions and few answers from the literature provided by the John Hancock firm.  Unfortunately, it is easy for individuals to be swindled into expensive policies that they may have to drop if premiums rise significantly or end up being of little or no use because the insurance company refuses to pay out benefits. 

Interestingly, an article in the February 26, 2008 edition of the Wall Street Journal discusses the same type of policy we are talking about here.  Journal reporters Jennifer Levitz and Kelly Greene (”States Draw Fire for Pitching Citizens on Private Long-term Care Insurance”) write about the new push by states to encourage private citizens to buy long-term care insurance, after President Bush signed into law the Deficit Reduction Act of 2006, which ended a ban on partnerships between states and insurers to sell long-term care insurance.  There is a pressing fiscal incentive for states to enter into such partnerships: in 2007, Medicaid costs for nursing facilities and other long-term care rose to $100 billion.  15 states, including California, are now in marketing partnerships with private insurers to promote these policies.  What’s the problem?  According to Levitz and Greene, these policies are marketed to low or middle income people who can’t afford or don’t need these policies.  They write about a bricklayer had purchased a policy in 2003 at a premium of $1,368 per year.  His premiums jumped to $4,920 per year in 2007, an increase of 260 percent.  After complaining, the bricklayer learned that he could keep the initial premium rate if he agreed to waive the inflation protection component of his policy.  He decided to drop the policy entirely, and was able to get back only $3,000 of the $7,000 he had paid to the insurance company.

Levitz and Greene go on to discuss the difficulties that the insured have in obtaining payouts and benefits from these policies.  They cite the case of an 87 year old widow, Betty Hoff, who was paying a yearly premium of $4,080 on a meager income of $19,200 a year when she fell at her home and could no longer live by herself.  The insurance company denied her claim, stating that she was not ”impaired enough.”  Hoff had to pay for care out of her own savings until a nonprofit advocate group took on her case.  The insurance company ultimately decided to pay.  Honestly, the last thing an 87 year old widow needs when she has suffered a devastating fall is to battle with the insurance company to pay for her daily care expenses.  How ridiculous is that?  Would you want your octogenarian parents to have to suffer this stress?  The insurance company is certainly quick to take your cash, but when it comes time to pay up, suddenly, the insurance company doesn’t know who you are and could care less.

 Levitz and Greene also note that the commissions that insurance agents make on selling such policies are among the highest in the industry, making it even more likely that agents will do the “hard sell” on potential customers.  Even more troubling, some of the states that have entered into such partnerships have been found to recommend insurance companies that have previously had run-ins with state regulators.  With states promoting such policies, there may be a false sense of security on the part of potential customers that these companies are ethical and honest.  In the case of California, the pitch letters are sent to potential customers on California Department of Health Services letterhead.  However, if you dial the toll-free number listed on the letter, you are connected to a private marketing firm hired by the state.

Clearly, there are legitimate reasons for states wanting to become involved in a general push towards private long term insurance, rather than relying on public funds to pay for residents’ long-term care.  However, as the Journal article demonstrates, there are many potential pitfalls to purchasing such a policy and buyer must beware.  So, as with any insurance policy, it absolutely pays to read the fine print and to buy a policy from a reputable insurance company.

My advice to my mother-in-law (should she want to take it) is to obtain written documentation from John Hancock on the points mentioned above before she considers buying such a policy.  She should research John Hancock’s track record as an insurer in the state of New York.  She should also do an accounting of her assets to see if it is even worthwhile for her to spend what likely will be several thousand dollars a year for many years to buy a policy that she may not even need.