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.

INSURANCE LESSONS FROM BREAKING BAD

Diagnosed with cancer and given only two years to live, high school chemistry teacher Walter White attempts to secure his family's financial future by teaming with his former student, Jesse Pinkman, to produce and distribute crystal meth.  — Netflix summary for Season 1

Would Walter have turned to crime if he had the right insurance in place?

Bad Breaks

Good  people get bad breaks. Walter never smoked but he got lung cancer anyway. By the time of detection, the cancer was considered untreatable. Were there no signs earlier?

Usually symptoms of lung cancer do not appear until the disease is already in an advanced, non-curable stage. — cancer.org

Most lung cancers are first diagnosed based on symptoms. Symptoms of lung cancer are not very specific and generally reflect damage to the lungs’ ability to function normally. The most common symptoms are a worsening cough that will not go away, and chest discomfort. Other symptoms include shortness of breath, spitting up small amounts of blood, unexplained weight loss, back pain, loss of appetite, and a general fatigue. — lungcancer.org

Walter shows many of the symptoms. There are precautions to offset the financial costs of disease.

Health Insurance

"All the incentives are toward less medical care, because the less care they give them, the more money they make." — John Ehrlichman on HMOs

Walter was covered by an HMO (Health Maintenance Organization). That's a US-style of cost containment with unfortunate side effects. The premise is good: treating conditions early is simpler, faster and cheaper than waiting until later. The HMO get fixed revenue per subscriber, which provides an incentive to tame costs. Members have financial incentives to stay healthy too. Their out-of-pocket expenses (if any) are lower for basic preventative care than for specialized care.

The HMO (which could be run for-profit) makes more by providing less. That's not the same as keeping people healthy. For instance, having too few doctors means a greater workload and an incentive to spend less time with each patient.

Walter experiences the drawbacks. His pricey chemotherapy isn't covered. In Season 2, a $13,000 hospital stay isn’t either. There’s a difference between an MRI which is diagnostic vs exploratory --- even when ordered by a doctor. Walter got the one that was excluded. Does that seem fair?

Another cost is waiting time. Perhaps the best doctors don’t want to work in an HMO where they’re often on salary.
Doesn't the Canadian healthcare system feel similar? We also have waiting times, limited choice and limited coverage.

A friend who is currently undergoing cancer treatment is getting injections which cost $3,000 each. Private health insurance covers 75%, which means an out-of-pocket expense of $750 each time.

Disability Insurance

Income replacement insurance helps replace your income if you're unable to work after a waiting period. The definitions and benefits vary. You might not be able to work during treatment or be able to return to work afterwards. The bills keep coming in even if the income doesn’t.

Employers might provide income during short absences. Perhaps full pay for X days and then a reduction until the long term disability benefits start. The self-employed may not even have that cushion.

Critical Illness Insurance

This coverage typically pays a lump sum a month after the diagnosis of a covered life threatening condition like cancer, heart attack or a stroke. The money can be used any way you want.

Walter could have used the benefits to replace income until the disability insurance benefits start, pay off debt and/or get the hot water heater fixed. A hot bath can be therapeutic.

Life Insurance

"… good state college … adjusting for inflation, say $45,000 a year, two kids, four years of college...$360,000. Remaining mortgage on the home, $107,000. Home equity line, $30,000, that's $137,000. Cost of living, food, clothing, utilities, say two grand a month? I mean, that should put a dent in it, anyway. 24K a year provides for, say, ten years. That's $240,000, plus 360 plus 137...737. $737,000, that's what I need." — Walter (Episode 201)

Walter wanted to leave his family enough to

• payoff debt: mortgage and line of credit
• fund university: for two children (one age 15 with cerebral palsy and a baby to be born)
• cover living expenses: for 10 years

Do you see the flaws in the planning?

There's no provision for unexpected expenses. There’s a bigger problem. What happens after 10 years? Walter’s wife Skyler is then 50. Is she to go to work then? She isn’t trained in Walt’s lucrative side business. Maybe Walter expects Skyler to find other sources of income such as from her writing or selling items on eBay.

What To Do?

Walter has been seriously underemployed. While teaching, he worked part time at a car wash. Also, teachers get two months of summer vacation. Given his intelligence and resourcefulness, what was holding him back? More money would have provided a better standard of living and covered the insurance premiums. His impending death brought him to life but that was too late.

Insurance looks like an expense but provides peace of mind. Insurance could be the best investment ever when purchased through the right advisor and insurers. The underwriting process may have detected the cancer early enough for treatment. That would have been a good break (though boring TV).

Links

• Life-changing events no longer trigger insurance purchases
• Income replacement insurance: a guide to disability insurance
• Two types of insurance you may have but cannot own
• Oblivion: what happens if my life insurance company dies?
• Case study: what to do when your term 10 rates are about to spike?
• Critical illness insurance (Riscario wiki)
• The best and worst times to cancel your life insurance
• Test your life insurance literacy
• Tips for first time life insurance buyers
• how to fund the insurance you need

Podcast 245

direct download | Internet Archive page | iTunes

PS If you rent your hot water heater, you avoid a capital outlay and have your repairs covered. That’s insurance too.

“FINANCIAL DOCTOR” JASON HEATH (CFP) INTERVIEWS “INSURANCE DOCTOR” PROMOD SHARMA (ACTUARY)

Jason Heath, a fee-only financial planner at Objective Financial Partners, interviewed me on the Objective Financial Hour (which does not run a full 60 minutes).

You may know Jason from his articles in the Financial Post (list). A recent column spurred the post, what does your advisor drive? (podcast 190).

Jason Heath

Jason is an Certified Financial Planner (CFP) who has spent more than 10 years preparing fee-only plans. He doesn’t sell any products, which brings objectivity to his recommendations. That's rare.

You can easily find financial planners who prepare plans for "free" because they get paid from the sale of products. The question is whether the best advice for you is free or for-fee.

What’s Discussed

You’ll find out about a range of topics related to insurance, investments and financial planning. The program has three segments.

Segment 1

General

1. what does an actuary do? (see me an actuary?)
2. fee-only financial planning (see why financial planning is ignored,  how to spot a fake fee-only planner and Preston Manning on financial planning)

Insurance Reviews

1. the uniqueness of fee-only insurance reviews
2. the reasons for getting a review
3. the three-step process (see Taxevity)
4. the types of changes that can be made after you’ve bought a policy
5. how an insurance pharmacy differs from a medical pharmacy

Trust

1. the biggest issue (includes slides)
2. sources of information and advice
3. ratings of honesty and ethics
4. more: who can you trust and what you like/dislike about your trusted financial advisor

Segment 2 (starts at 0:17)

Insurance

1. the core of insurance
2. the importance of the mortality curve (see insights from Pink Floyd)
3. why life insurance offers tax advantages (see secret 7)
4. the drawbacks of investing inside life insurance (see the two drawbacks)
5. the flaw in “buy term and invest the difference” arguments (see what would Warren Buffett do?)
6. selling the sizzle instead of addressing a need
7. the RRSP preserver
8. using life insurance to pay tax liabilities

Segment 3 (starts at 0:33)

Life insurance

• life insurance as an investment
• life insurance for estate planning
• who benefits from buying life insurance for estate purposes
• more: the top five insured strategies,

Income replacement insurance

• if you think or hope you won’t get sick, why buy coverage?
• a component of retirement planning
• how good are the definitions of disability? (get “own occ”)
• more: a guide to disability insurance and losing your livelihood: insuring against the risk

Critical illness insurance

• what is it?
• how can the benefits be used?
• more: the basics of critical illness insurance

Long-term care insurance

• when are benefits payable?
• when’s the best time to buy?
• the misguided view of public health care
• see long term care takes planning (Financial Post, Oct 2012),  do you care about long term care? and the staggering cost of dementia

The fiduciary question

• is an insurance advisor a fiduciary?
• most advisors are well-intentioned but problems occur
• see the word advisors imply but dare not say, the new prescription for trust, where does your advisor get advice and The Globe and Mail on the insurance loophole 

The Interview

For the first time, I’m using several slides during an on-camera interview. That spares you from watching Jason and me for the full show. Now grab your popcorn and beverage. Here’s the interview.

That’s all.

Links

• Jason Heath: LinkedIn, Financial Post, Objective Financial Partners
• Exploring the inner worlds of investments and insurance
• Why insurance advisors also sell investments
• The six basic fears identified by Napoleon Hill
• The six financial fears of Canadians
• How to leverage your philanthropic gifts
• Three reasons the rich get richer
• The four financial risks

Podcast 193

direct download | Internet Archive page | iTunes

PS What other questions would you like answered?

DO YOU CARE ABOUT LONG TERM CARE?

Thirty years ago, how the words would flow
With passion and precision,
But now his mind is dark and dulled
By sickness and indecision.
— Rush, Losing It

We're living longer than ever (see longevity over the last 100,000 years). That progress doesn't ensure we'll have a high quality of life in our final years. We may be unable to care for ourselves financially or physically. Babies don't mind but we're not babies. We can plan.

Ken's Parents

Gerontologist Ken Dychtwald explains what happened to his own parents.

The tale of Ken Dychtwald's parents

At least Ken's parents had long term care insurance. Coverage is harder to get these days. My first full-time employer, MetLife stopped selling coverage in 2010.

Plans typically provide cash for

1. cognitive impairments (inability to think, perceive, reason, remember), or
2. the inability to perform two of the five activities of daily living without help (bathing, eating, dressing, toileting, transferring positions of the body)

Provisions vary. There are limits and exclusions (the fineprint taketh away). Yet coverage can provide valuable financial support.

Since we think we'll be immune, we're reluctant to prepare. If your parents need long term care, your inheritance can melt away. One strategy is to buy insurance on them (if they qualify).

What Do People Live For

Ken showed this video at CALU 2011. You don't need to know Taiwanese to be moved by this quintet. They have an average age of 81, various ailments and a dream.

Dream: the adventure of five Taiwanese average age 81 (based on a true story)

We too can dream and do. Why wait? Get on your bike and ride!

Links

• Long term care takes planning (Financial Post, Oct 2012) (new)
• Dealing with the staggering cost of dementia
• Longevity over the last 100,000 years (Ken Dychtwald at CALU 2011)
• Three ways for hockey players (and you) to save for retirement
• Are you saving too much for retirement?
• The four financial risks
• Long Term Care (Riscario wiki)
• image courtesy of Nicolas Raymond (Montreal)

Podcast 118 (3:22)

direct download | Internet Archive page | iTunes

PS Why not care about the long term before you need long term care?

LONGEVITY OVER THE LAST 100,000 YEARS (KEN DYCHTWALD AT CALU 2011)

"For 99% of human history, longevity was under 18 years." — Ken Dychtwald

Gerontologist Ken Dychtwald (LinkedIn profile) of Age Wave spoke about aging and retirement at CALU 2011. (In the previous blog post, we discovered how the wealthy feel about their advisors.)

History

"I hope I die before I get old." — My Generation, The Who

Imagine 99,000 years with a life expectancy at birth of less than 18 years. Our ancestors died before they got old. Infectious diseases were a big culprit. Maybe the rock bands of those eras sang "I hope I live until I get old". 

Now, living a billion seconds is commonplace. Since 1900, US life expectancy has grown from 47 years to 80. That's a huge change in one century and unprecedented. Count on this trend continuing with medical advances. If only there were inventions to make our money grow and maintain our quality of life.

Economic Uncertainty

We risk losing health as we age. Treatment, lifestyle adjustments and long term care can be expensive.

The greatest fear is becoming a burden on the family (55%), followed by ending up in a nursing home (24%) and using up savings (12%). For the caregiver, the biggest worry is the emotional toil (57%), followed by the costs (49%) and impact on their own lifestyle (21%). That's from the 2010 Let's Talk survey conducted by Age Wave and Harris Interactive for Genworth Financial (PPT).

Would you rather have more money or predictability?

According to the same survey,

• 21% want to accumulate as much wealth as possible, while
• 79% want to save enough to have financial peace of mind (whatever that means)

Our views change during periods of exuberance and uncertainty. Maybe this desire for safety will remain. However, an aging population and longer lifespans are a bad combination when investment returns are volatile in our interconnected global economy.

In another CALU session, David Solie (LinkedIn profile) said that aging and volatility have created a new species of complexity. We're getting older and can't count on what we counted on counting on. Will it get any worse?

The Evolution Of Retirement

In this video, Ken shows how retirement has changed over the years.

Ken Dychtwald: Re-Visioning Retirement

The Science Of Longevity

Not only are we living longer, medical developments are likely to continue that trend.

Ken Dychtwald:: Exploring the science of longevity

The Bright Side

In the past, life was linear: education, work/family and leisure (retirement). Is that appropriate now that we're living longer? Why not spend our "longevity bonus" throughout life rather than at the end? If you're an employee, this is tougher to do. Entrepreneur have much more flexibility — should they choose to use it.

If you like what you're doing, you might continue working. That helps pass the time and provides income. Retirement can now last longer than people lived in prior millennia. Rather than leaving a legacy, there's an opportunity to live a legacy.

Links

• How the wealthy feel about their advisors (CALU 2011)
• Genworth/Age Wave "Let's Talk" Survey (2010) | PDF and PPT
• Long Term Care survey (Genworth Financial press release)
• Dealing with the staggering cost of dementia
• Your life expectancy exceeds 1,000,000,000 seconds
• Afraid So (Jeanne Marie Beaumont, poem read by David Solie)
• photo courtesy of Steve Jurvetson (US) + discussions

Podcast 117 (4:45)

direct download | Internet Archive page | iTunes

PS Let's take care of our health now so pain doesn't prevent us from enjoying our longevity bonus.