Long Term Care Insurance Interview with Gerry Goldsholle
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The following is a transcript from an interview with Gerry Goldsholle, a California attorney with extensive experience in the insurance industry and consumer rights. Attorney Goldsholle was involved in the conceptual stages of long term care insurance. In this interview, he provides insight into how long term care insurance came to be and offers commentary on the current long term care issues facing the insurance industry and consumers.
FreeAdvice.com: What is long term insurance?
Gerry Goldsholle: Long term care insurance is designed to pay the policyholder money if and when the person who is insured becomes incapable of performing a sufficient number of activities of activities of daily living and requires assistance to perform such activities. Activities of daily living include the ability to bathe oneself, to feed oneself, to transport oneself from one location to another and several similar activities.
FreeAdvice.com: What is the history of long term care insurance? Is it a relatively new product?
Gerry Goldsholle: Long term care insurance was developed during the 1980s in an attempt to anticipate the needs of the rapidly aging population. In the past, people relied on family members to take care of them if they became incapable of caring for themselves. In modern America, families are increasingly spread out across the country. In addition, most households have two working family members. It's frequently difficult or impossible for a spouse or child to take care of a family member who becomes incapable of taking care of him or herself. Long term care insurance provides cash that helps or enables people to hire someone to help the person needing long term care.
FreeAdvice.com: Why was long term care insurance created?
Gerry Goldsholle: There is a definite social need and value for long term care insurance, and where there is a need, there is usually an opportunity for a business create and provide a product or service that meets that need, which will also be profitable for the business. From the insurance company side, the issue has always been whether or not the insurance company can properly price that product.
Insurance premiums are usually based on experience and when companies began to create long term care insurance, there was very little real experience to go on. I know because I was involved with the early development of the product. While there was some data on the number of people who go into nursing homes, proving that a "nursing home only" product was not going to be a big seller. People resist going into nursing homes – they just don't want to go to a nursing home. We recognized that if the industry could design a product that would pay benefits without a person having to enter a nursing home, it would be a far more desirable product, with a much larger potential market. That's why most long term care insurance policies today cover people who need not go into nursing homes, but require some assistance and can get that care at home.
There was precious little actuarial data to show what the cost would be if we created a long term care product paying money to care for people at home, as the very prospect of paying money would change the dynamics. Would we insure a cross section of the American public, or would we find that the purchasers are people who would be most likely to make claims? How would the existence of the product change the demand for at home care? Would a large percentage of families that otherwise have provided care to an elderly relative stop providing that care because it was insured, and instead go out and hire someone else to provide the care? Thus, there was great uncertainty as to the costs going forward, and depending on how the policies were designed, that could come back to bite the insurance companies and/or the policyholders.
Most elderly people did not want to go into a nursing home. A nursing home was regarded as death's waiting room and people have long tried to avoid the need to go into nursing homes where such care was traditionally provided. People wanted to have care provided in their home setting if at all possible. Long term care insurance essentially migrated from being a nursing home policy to a policy that paid benefits to people who could still stay at home, but needed some assistance in that home to conduct their normal daily activities.
The premiums on the long term care product, especially as you get north of age 60, become reasonably high. Many life insurance companies also looked at long term care insurance as an additional product for their agents to sell. The typical buyer of a long term care product is someone in his or her 50s or 60s, and those people generally don't need to buy life insurance. Thus, long term care insurance was a product that could be sold to what is the most affluent age group. This demographic was affluent and growing rapidly.
Some insurance companies saw long term care insurance as a product that could carry very high commissions and thus support and grow their field forces. There is competition among companies to attract agents and insurance companies know that high commissions are one of the best ways to attract agents and motivate them to sell your products. That's often not good for consumers or the companies in the long run, but some corporate managers take a short term viewpoint and sales managers are measured on sales growth, not on what's good for the consumer or for long term profitability. Cash value life insurance typically is a product that involves high commissions.
Long term care insurance is triggered by some future event – such as the inability to provide for one's activities of daily living – and that may never occur or may occur some time in the future. That enables the money that is paid as premium today to be invested by the insurance company.
Investment income is the way most life insurance companies make their principal living. The fact that they have to cover certain events such as a catastrophic illness, disability or the inability of a person to engage in a sufficient number of activities of daily living is the basis for them to justify receiving the premiums.
From an insurance company perspective, this was a product that had the potential to bring in significant amounts of premium that could be invested by the insurance company and paid out perhaps some time in the future. Insurance companies knew people didn't want go into nursing homes, so even if you had insurance that only paid for nursing home stays, people would still fight to avoid going into nursing homes not withstanding that that would be paid for.
The critical issue was how would the availability of long term care insurance change behavior patterns so that if the insurance company paid for it - why not get an aide to come into the house for several hours a day? Why not hire somebody to save the family member's need for coming in and interfering with his or her own life. That was one of the major factors the insurance companies were concerned about when it came to long term care insurance - that the availability of this insurance would change usage patterns.
Some insurance companies were overly enamored with the prospect of getting relatively high premiums in the door, with the likelihood that they wouldn't have to pay immediate claims on the policies and thus could earn investment income on the money and disregarded the prospect of getting large claims down the road. Many companies just didn't really price for it or anticipate the risks lying down the road.
FreeAdvice.com: Can you explain long term care coverage?
Gerry Goldsholle: There are two basic types of policies. One type pays only to reimburse the policyholder for the expenses that are actually incurred. So, if grandma becomes disabled and unable to care for herself, no money is paid out by the long term care insurance company unless someone pays money to care for her. So, if I hire an LPN (licensed practical nurse) or nurse's aide who comes in for four hours a day, they'll reimburse the cost (subject to the policy limits). Such policies typically require that the payment for the care be to an outsider and do not pay for care rendered by a relative of the insured person.
Another type of long term care policy pays if an event or certain circumstances are present. For example, there are types of policies that trigger benefits merely if the insured person becomes disabled or incapable of performing three activities of daily living. They then pay the insured an amount of money per day towards the actual costs that are incurred. Other policies pay if the triggering condition is met, so they will pay the money even if I don't hire an LPN, but bring in my daughter to handle that work.
One of the critical things emerging in this area is that many insurance companies did not know how to price the product early on. Some built provisions into their policies to permit them to increase the premium and companies are increasing the premium dramatically at this point in time. Why are they increasing the premiums? It may be that the usage is much higher than was anticipated, but it also may be that the investment earnings that they had hoped to achieve when they originally priced the product have been much lower than they expected. Interest rates have fallen dramatically from the rates of the '80s and early '90s and they're not making the big returns they expected on the investment money.
FreeAdvice.com: Do you think that's one of the reasons why a lot of policy benefits are being denied?
Gerry Goldsholle: The lack of investment performance on the reserves set up for long term care insurance may be adding to the pressure. If you are the product manager of the long term care line at an insurance company, you don't want to look bad. You're not making significant amounts of money on your investments and certainly being generous on the claim side isn't going to improve your overall financial results. The money that you pay out is going be charged to your line of business.
As a result, many companies increasingly are becoming far more restrictive than they would otherwise have been when it comes to claim payments. In many instances, they've been improperly denying claims they should have been paying.
Another factor, separate and apart from the financial results, is that many of the insurance companies that originally wrote long term care insurance were mutual insurance companies. These were companies that were essentially owned by or operated for the benefit of their policy holders. Over the past decade, some of the largest and best life insurance companies -- companies such as Prudential, Metropolitan Life, John Hancock and Equitable have converted to stock companies. Stock companies are owned by outside shareholders, not policyholders. Now their focus is primarily on Wall Street, not on their policyholders. So, they are now competing on Wall Street for attention and have to show profits and growth to achieve good price - earnings ratios.
As a result, many of the life insurance companies that wrote long term care insurance have basically changed their structure and mission from the time the policies were issued. Some have become just another for profit company that's out to make money, often at the expense of the customers. There's a lack of nexus between the customer and the owner because the owner is now somebody different than the customer.
FreeAdvice.com: Who is the target market for long term insurance products?
Gerry Goldsholle: From the insurance company perspective, this is a sale based on fear or risk. One target market is the older person himself who may be concerned that he may deplete his assets and have to go into a nursing home. He might think, 'You know, I won't be able to stay at home. I won't be able to take care of myself. I may lose everything I possibly ever had. What'll happen to me? There's nobody to take care of me.'
The second target market is the family member of an older person who says, 'My God, Mom or Dad or Aunt Millie is getting on in years. I'm the family member responsible for his or her care and that will really tie me up. I won't be able to work. I won't be able to travel. It will impact my ability to care for grandchildren and I am getting older too. I don't know what's going to happen in the event that this relative is going to need some care and I really don't want to have to put the relative in a nursing home. I don't want him to have to rely on the mercies of the Social Security Medicaid System down the road, so let's just buy some insurance to protect against that.'
FreeAdvice.com: What about buying long term care insurance for children and grandchildren?
Gerry Goldsholle: The insurance company would love people to buy this product when they're very young as the likelihood of something going wrong when you're very young is very, very low and therefore the product is priced lower. However, the longer you put in the money, the more assets you'll pay, producing long term dollars the insurance company will invest in its account.
It's wonderful for a life insurance company to sell a product to someone that's young because not only does the money come in, but the buyer may get tired of paying for it and let it lapse, so all the insurance company does is collect the premium and it never has to pay out any claims. It's a great deal for an insurance company. It's also a great deal for the agent because he or she gets a rather substantial first year commission and ongoing commissions for a while on these long term care policies. That's what motivates insurance agents to sell the product.
FreeAdvice.com: How is the product marketed?
Gerry Goldsholle: There's an incentive for the insurance companies to sell it because they get money to invest. They increase their premium flow, and that's good for them. The companies that have been issuing long term care insurance are life insurance companies. However, the popularity and the need for life insurance have been declining in recent years as well as new sales, the price and the premiums, especially in inflation adjusted terms. There have been all sorts of socio-economic changes that have diminished the attractiveness of life insurance as a product.
You have to ask, what are these life insurance companies doing to support their infrastructure? They often have very expensive infrastructure. They need to bring in new sources of premiums, otherwise they have to change the way they do business and that's hard to do in a big entity. Similarly, agents are having difficulty selling more and more life insurance because the need for it has declined. There are changes in the estate tax that are impacting the need for insurance as well, and with dual income families and self-sufficient spouses, life insurance doesn't serve the very same function.
Long term insurance itself is often marketed by individual agents, typically with a generous commission structure. Long term care insurance is also offered through some associations using products with a somewhat reduced commission structure. It's also marketed at the workplace by larger employers as an optional employee benefit in the form of group insurance, sometimes with a very low commission structure.
FreeAdvice.com: Would you recommend purchasing a long term care policy?
Gerry Goldsholle: I think the need for a long term care policy really depends on one's individual family situation, on one's own financial situation, one's health situation and one's risk tolerance and comfort level. I've seen long term care insurance being purchased by very wealthy people who have a lot of extra money. They say that if they need long term care, they don't want the cost of that care come out of their estate. They want the cost to be born by the insurance company, and are willing to pay the premium to shift that risk.
One could say, if you don't need it, why are you buying it? If you have significant income and resources, and that income and those resources will continue to come in if you become unable to fully take care of yourself, is there really any sense to buying long term care insurance? But we are all different, and that's why some do and some don't.
On the other hand, it never makes sense to impoverish yourself today by paying premiums you can't afford. If it will make a real dent in your lifestyle to guard against the possibility that you may have a disability down the road and get some money for it, then why buy it?
FreeAdvice.com: Along that same line, are there specific individuals that you would recommend to purchase the product or not to purchase it?
Gerry Goldsholle: Yes. I would recommend long term care insurance for a person who lives far from his or her family, is financially comfortable – but not super-wealthy -- can afford the premium and is worried about "what if" he became unable to care for himself. That would be somebody for who long term care insurance makes sense.
In addition, if you have a distant parent who is struggling to make ends meet, you may want to purchase it for them so that the financial burden won't fall on you and you will essentially trade off the possibility of a significant expense down the road for a small and affordable premium now. Children may want to chip in and buy a long term care policy to both assuage their possible guilt and to pre-fund a parent's possible need for long term care.
FreeAdvice.com: Do you have any suggestions that would help individuals purchase a long term care policy?
Gerry Goldsholle: I would look at the ability of the insurance company to make premium increases. Look at the financial strength and integrity of the insurance company. There are significant differences between insurance companies that most people aren't aware of. Ratings are helpful in terms of financial stability of the insurance company at the particular time, but a rating is very much a snapshot rather than a predictor.
There are a series of ratings from Best insurance reviews to Moody's to Weiss ratings. These ratings are something to consider, but the fact that an insurance company may look terrific today doesn't mean it will be down the road. One of the largest insurance failures in recent history was a company called Executive Life. That company enjoyed top of the line ratings by some of the rating agencies – just until the time it went under.
FreeAdvice.com: What are some of the limitations with long term care policy limits?
Gerry Goldsholle: From an underwriting point of view, the insurance company wants to insure people that are in good health. It does not want to insure people that are already sick because those people are likely to file claims sooner and that means they don't make money on those policy holders.
They look for people who are pretty healthy among the general spectrum of a population and they price for certain disabilities and conditions they feel are more likely to lead to an early claim. For example, if someone has a tendency for high cholesterol, which may suggest a greater potential of stroke and therefore a triggering of the conditions requiring payment of benefits, they may price premiums higher or not issue a policy at all.
Insurance companies also know that people who tend to buy far more insurance than is reasonable for somebody in their circumstance are not good risks as they may be hiding something that the insurance company may not be able to pick up on.
FreeAdvice.com: What other areas should consumers be aware of when purchasing a long term care policy?
Gerry Goldsholle: Waiting periods for benefits to begin, and more significantly, how long the benefits continue after they kick in. They are CRITICALLY important aspects of any long term care insurance policy.
Of the two, WHEN benefits begin is far less important than HOW LONG they continue. In theory, long term care policies could start paying benefits day one, so that the insured person in need of long term care could start collecting benefits the day he or she required sufficient assistance with activities of daily living to qualify for long term care benefits and/or incurred covered expenses
Policies almost always require some delay between qualification and the date benefits begin. That makes sense from both a pricing and practical standpoint. Absent a sudden event, such as a disabling stroke, there often is some gradual decline in the ability and that can raise questions of proof.
Long term care policies typically provide for at least a 30-day waiting period – after the insured person is no longer able to engage in a sufficient number of activities of daily living, such as the ability to bathe or care for themselves. However, a 60-day waiting period, a 90 –day waiting period, a 120-day waiting period, or a 6 months or a year waiting period will reduce the premium, often dramatically. The longer the waiting period, the lower the premium should be, because the insurance company is not paying out on the first dollar. So, a waiting period helps people significantly reduce premiums.
The second point is to find out how long the insurance company will be paying benefits? For example, if the insurance company agrees to pay benefits for up to a maximum of two years from the date the long term care insurance benefits start, it has significantly limited its potential exposure. On the other hand, if the long term care insurance company agrees to pay benefits for up to five years, it's providing two and a half times greater possible exposure. If it provides lifetime benefits, the insured could have a much longer benefit pay out period and therefore the long term care company has to charge a greater premium.
Most people would be far better off having a longer waiting period before the long term care insurance benefits begin and a much longer duration period for the length of time that benefits are payable. Therefore, I would suggest that most people consider a six month waiting period, but have the benefits payable for life.
The danger that people face is they might have a stroke or develop Alzheimer's disease rendering them disabled for as long as they live – and sometimes that's a long time – during which long term care is required. That could be a significant financial catastrophe.
FreeAdvice.com: What about claims denials?
Gerry Goldsholle: If you have a long term care policy and become disabled so that you qualify for benefits, it's time to call in the experts. Some lawyers will assist the person seeking benefits on how to submit the claim for a relatively small up-front fee. It's better to get the claim approved in the first instance than to sue later. They'll charge an hourly fee, but it may be the best and most valuable advice you ever got.
If the insurance company denies long term care benefits, you'll definitely need a law firm that knows long tem care insurance operates, and can, if your claim is eligible, get you the benefits you are entitled to.
FreeAdvice.com: How much would you say word of mouth is worth when buying a long term care policy?
Gerry Goldsholle: Very little. In fact, almost zero. Anecdotal information and word of mouth from friends and family is usually of very, very limited value because the friend typically has had very little experience with long term care insurance. Sure, if a friend has had a bad experience with the long term care company, it makes sense to be very cautious. But a good experience means less. With any particular company or product, a friend's experience is typically not entitled to great weight. Complaint records with a state insurance department based on the number of complaints per policies issued, that's more meaningful.
FreeAdvice.com: Thank you for the excellent advice.
Gerry Goldsholle: You're welcome.