WHEN CAN INSURERS CHARGE MORE FOR THE INSURANCE YOU ALREADY OWN?

Insurance companies make mistakes which cut into their profits. This is called underpricing and happens more often than you might expect. Sometimes assumptions prove wrong and other times matching the competition causes the trouble.

Can the insurer charge you more for the insurance you already bought?

When Prices Can Increase

Some products have premiums which adjust annually (usually upward). You’ve probably noticed that with your car insurance and home insurance. The premiums for employee benefits (e.g., hospitalization, prescriptions, dental care, disability) also change but you may not know. Since that’s one of the two types of insurance you can’t own, your employer can cut back on benefits to save money.

If you’re not happy with your insurer, you’re free to switch companies with no penalties and little effort. When prices go up, you can also reduce or cancel your coverage, which exposes you to more risk. 

Where You Have More Protection

You face problems when you buy insurance with premiums based on your health. If your health deteriorates, switching to a new company will cost more — if you can even get coverage. Put differently, you’re stuck with your insurer. You have no recourse against their premium increases.

Guarantees reduce the insurer’s flexibility to make changes. Since you’re protected from surprises, you pay more. You also get much more. The level of guarantees depends on competition and regulation.

Example: Long-Term Care Insurance

Imagine buying a Lexus for $5,000 down plus $500 a month under a contract that allows the dealer to raise the monthly payment if he wants to. Six months in, it goes to $800, and you have a free choice between paying up or handing in the car and losing your down payment. That would be a ridiculous contract to sign. LTC [Long-Term Care insurance] buyers sign contracts like that.
— Forbes (Aug 2013)

Here’s a sad example from the world of Long-Term Care Insurance in the United States. By 2012, half the top 20 insurers stopped selling new policies (though you can likely keep coverage you already have). Premiums keep going up.

John Hancock is boosting premiums by an average of 40%. Some clients are paying much, much more. Would you believe 90%? That’s what a couple in their 60s faces as their annual premiums jump by $3,958.74 from $4,398.61 to $8,357.35.

"We bought these policies because this [long-term care] is the only insurance you really need. Long-term care will eat up all your assets. We were told when we first bought the policies that the rates could go up, but 90% seems outrageous." — John Holtzman, age 67

To offset the increases, this couple is planning to reduce their protection. That puts them at greater financial risk. Cancelling coverage would be worse.

What Went Wrong?

“… the industry over all made incorrect assumptions when it set premiums for older policies — particularly, those issued before 2002 — and didn’t set rates high enough. For instance, far fewer people than anticipated let their policies lapse. And interest rates in recent years have been much lower than expected, making it difficult for companies to earn adequate returns on invested premiums.” — Thomas J McIrney, Genworth CEO

Long-Term Care insurance usually pays a daily benefit if you’re unable to perform two or more activities of daily living such as bathing or eating. The money can go towards help at home or a nursing facility.

The Problems

Problems arises when

• you think you have guarantees but don’t
• you don’t explore the guarantees you have
• you know premiums can increase but don’t examine the “worst case scenarios”

The best time to find out is when you have the most options: before you buy.

Links

• Do you care about long term care?
• Does your insurer win when you cancel your coverage?
• Dodge the long-term care insurance mess (Forbes, Mar 2013)
• Feeling ill-effects of private long-term care insurance (LA Times, Mar 24, 2014)
• Premiums rise for long-term care insurance: keep it or drop it? (New York Times, Mar 21, 2014)
• Long-term care insurance: insurers are forced to boost premiums or stop selling policies (Consumer Reports, Aug 2012)
• A winding road to benefits from long-term care insurance (New York Times, Mar 2013)
• New long-term care insurance policies offer more options (USA Today, Dec 2013)
• What you need to know about long-term care insurance (Wall Street Journal, Jul 2013)
• image courtesy of Warren Miller

PS You’ll get the best answers by taking the time to find the right advisor.