3 Villains, No Heroes -The Genworth Long Term Care Insurance Saga
By J.R. Robinson, Financial Planner (November 6, 2023)
Over the past couple years, I have written a few articles for the Financial Planning Hawaii Blog offering advice to Genworth Long Term Care Insurance policy holders about how to deal with letters they receive from Genworth informing them of massive current and planned premium increases and offering them a range of confusing and often unappealing “settlement options.”
These articles have produced a steady stream of calls and emails from Genworth policyholders from across the United States, some of whom have paid premiums for more than 20 years. Many of these people are distraught and angry at effectively being forced to out of the contracts by premium increases just before they reach the stage in life where they may need to file claims. Few of them understand the options that are presented or are aware that they have other options beyond the ones in the settlement options notification letters. Few of the people who have contacted me have experience that would enable them to make rational, informed decisions about managing their policies to avoid or ameliorate future premium increases.
In this article, I will update readers on the latest developments and offer some advice to help policyholders guide their decision-making.
The Backstory
In the late 1990s, General Electric made the ill-fated decision to expand beyond manufacturing and enter the financial risk-management business. Consistent with the Jack Welch era mantra of being #1 in every industry it enters, GE Life Insurance made the bold decision to enter and dominate the burgeoning long term care insurance business. The nascent industry was already crowded with established incumbent insurance companies all of whom were confident that the soon-to-be retiring baby boomers would be eager buyers and would provide a steady stream of new policy holders along with a steady stream of insurance company profits.
As it turned out, the insurance companies got the first part right. The baby boomers, who were renowned for their proclivity for saving and planning for their future, were indeed eager buyers. What all the insurance companies, including GE, got completely wrong was the pricing. A combination of disastrously bad actuarial assumptions (including the assumption that policy lapse rates for LTC policies would mirror comparatively much higher lapse rate of life insurance policies) and overly aggressive pricing pressure from the folks in marketing turned out to be a recipe for financial disaster.
To make matters worse, a primary way in which insurance companies earn profits from policy sales is by investing the premium payments in bonds. The pricing models developed by the insurance companies in the 1990s did not account for the possibility that interest rates on bonds would plummet in the early 2000s and stay down for more than two decades.
By the mid-2000s losses from LTC policies were a huge albatross around the insurance companies’ necks and nearly all the major players stopped selling policies or sold their LTC business at a loss and exited the market space. For its part, GE Life Insurance followed the Jack Welch playbook to a T and quickly succeeded in dominating the space. It achieved this feat by offering benefit-friendly policies at lower premium costs than most competitors. This enormous miscalculation was one of the factors that led to the parent company’s precipitous fall from grace. In 2003, as part of a larger restructuring plan, GE announced its plans to spin off its insurance business into a separate company – Genworth Life. In 2004, Genworth was launched through an IPO.
Two Villains
By the late 2000s, it was clear to many insurance companies, including Genworth, that they had badly mispriced the product and would need to raise premiums to existing policyholders to pay future claims and remain solvent. A common question I get from policyholders is, “How can they raise premiums? The insurance agent who sold me the contract told me the premiums were fixed?” I sat in on several GE LTC seminars and even sold a few policies to clients in the 1990s and early 2000s and can attest that the policyholders’ recollection is not exactly correct. What GE told prospective buyers was that the premium would be fixed, but that it could be increased in the future if some event occurred that forced the company to raise premiums for the entire class of policyholders. The unambiguous implication in those seminars, however, was that the chance of future premium increases was exceedingly low. In fact, not only have premiums increased, for some policyholders they have increased 5-fold with future increases in the offing.
Clearly, Genworth is a villain in this story. I consult with Genworth policyholders and their families all the time and can attest that the insurance company has inflicted immeasurable financial harm and emotional distress on thousands of hapless policyholders who were trying to do the right thing by planning for future long term care expenses. However, Genworth is not the only “bad guy” in this story.
If there was a bright spot in this story, some might point to the class action settlements that law firms have negotiated with Genworth as a silver lining for policyholders. Surely the lawyers are the good guys in the story, right? Hmmm… not exactly. For a number of years, Genworth was besieged by class action lawsuits that challenged Genworth’s rights to jack up premiums. Genworth was successful in defeating these suits because the language in the contracts explicitly granted the company that right.
However, the lawsuits that have succeeded in persuading Genworth to settle took a slightly different tack. Instead of challenging Genworth’s right to raise premiums, they claimed that Genworth harmed consumers failing to tell them that they planned to make multiple premium increases in the future. In these cases, the attorneys argued that had such disclosure been made, policyholders may have made different decisions about whether to agree to the premium increases. However, a careful review of settlement offers that have been presented to policyholders seems to indicate (1) that the settlements are actually beneficial to Genworth in helping them get the policyholders with the riskiest/most costly contracts to fold by accepting a settlement offer, and (2) that the law firms’ compensation is tied to the number of policyholders who accept the settlement offers. In other words, the settlement offers appear to be a win-win for Genworth and the class action law firms.
By my read, the only ones who do not benefit from the class action settlements are the policyholders. A review of the settlement offer letters supports this viewpoint as Genworth’s disclosure of its expected future premium increases in big bold letters, is clearly designed to scare policyholders into forfeiting most of the benefits they have paid for and to accept a bare-bones settlement offer instead.
EXAMPLE
Typically, the settlement offers include two paid-up policy options that offer policyholders a choice of a paid-up policy option with a benefit pool that is roughly equivalent to the amount of premiums paid or a cash payment and paid-up benefit less than the total value of premiums paid. Each time a consumer elects one of these options, it wipes a major potential liability off Genworth’s books and pays a nice “commission” to the settlement attorney.
The attorneys who might opine that they have at least obtained a way for policyholders to get their premiums back, these offers are little better than the non-forfeiture options that are included in most long term care insurance policies. If the policyholders had not purchased the policies and had instead invested the premiums each year, they would most likely be far better off.
The Unsung Villain
In theory, Genworth policyholders have a protector in the wings – their state’s Insurance Commissioner. Using my home state of Hawaii as an example, here is the stated function of the Commissioner:
Many consumers do not understand that insurance is a regulated industry and that each state has an insurance commission that must approve all premium increases to consumers. A question that begs asking is why have all these state insurance commissioners who are ostensibly employed to protect consumers effectively rubberstamped their approval of nearly all insurance company rate increase requests?
I believe the reason is attributable to commissioners being asleep at the switch in overseeing the industry from the outset. My sense is that the financial ramifications of denying rate increases and simply allowing of allowing LTC carriers to fail would be catastrophic. In Genworth’s case, it is my understanding that because Genworth had such a large share of the market, allowing Genworth to fail could potentially exhaust the state insurance guarantee funds. In a previous article, I noted that an insurance commissioner from Massachusetts had the audacity to blame consumers for not reading the fine print in their policies.
To my thinking, the state insurance commissions have done no favors for consumers either. In some ways, the insurance commissioners may even be the worst villains in the Genworth LTC saga. Genworth is a publicly traded company with an obligation to its shareholders to maximize profits. Similarly, class action law firms are private companies that profit mightily by settling lawsuits. In economic terms, they are simply maximizing their utility. But the insurance commissioners are different. Their primary job is to protect the interests of consumers. By approving Genworth’s outrageous and outsized premium increases, the insurance commissioners are placing the insurance companies’ interests ahead of the consumers. In this light, the insurance commissioners might just be the biggest villains in this entire sordid tale.
Tips for Policy Holders
So, what should you or a loved one do upon receiving a Genworth settlement offer letter with projections for future planned premium increases? First, determine if the policyholder may qualify to claim benefits now. In my experience, many people are reluctant to file claims because they either do not wish to accept that they may need custodial care or do not understand the qualification process. Claims eligibility is typically based upon either a determination of cognitive impairment or the policyholder’s need for substantial assistance with at least two out of six activities of daily living. Many policyholders with whom I speak are unaware that qualification for benefits may trigger a waiver of policy premiums.
Second, policyholders should be aware that the options in the settlement letters are not the only choices available for amending the original policy terms. In fact, in my experience, the settlement options are rarely an optimal choice. Policyholders may alter certain features of the contract to reduce or sometimes avoid future premium increases. The optimal new benefit feature structure may vary depending upon client circumstances.
Policyholders should also take the time to read their original policies. They are not as complicated as you may think, and you may discover valuable features. For instance, many policyholders are unaware that their contracts include thousands of dollars for home renovations to improve accessibility and enhance safety. Many contracts also include a provision for training relatives to become caregivers so that they may receive the daily benefit amount paid by the policy.
Related Reading:
Should You Accept a Genworth Long Term Care Insurance Settlement Offer?
What if the Company that Issued my Policy Fails?
John Robinson is the founder and owner of Financial Planning Hawaii and Fee-Only Planning Hawaii. Readers who have questions about this article may contact him directly at jr@fphawaii.com.
