How Strong Is Your Insurance Company?

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Two types of insurance deserve serious consideration as part of a retirement plan. Should you purchase:

Blocks collapsing to symbolize a weak insurance company failing to meet promises

  1. An annuity to provide longevity insurance?
  2. Long-term care (LTC) insurance to protect you from large expenses if you can no longer care for yourself as you grow older?

Either requires giving up a sum of money that could be spent or invested now. In exchange, you receive the promise of a potential future benefit.

I’ve covered the pros and cons of annuities in the past. Darrow has covered whether LTC insurance is a good deal.

In each of these analyses, one implied assumption was that risk is transferred from yourself to an insurance company. They would be able to pay if and when the time came that you need the policy. However, I was recently contacted by a reader for whom that assumption has not worked out as planned.

How can you assess the quality of an insurance policy and the strength of the company backing it to assure you don’t end up in a similar position?

The Scenario

This reader paid premiums to Genworth Life Insurance Company (GLIC) for more than a decade for a LTC insurance plan. Then one day, he received a letter in the mail that he shared with me. 

The letter informed him that he was one of approximately 207, 000 policyholders subject to this class action settlement ”to secure redress for alleged false representations made by Genworth when offering various contractual options to its policyholders and alleged failures to disclose anticipated premium rate increases.”

No Good Options

He was given a few options:

  1. He could keep the policy. This required paying higher than anticipated annual premiums to maintain the policy. However, the letter informed him that credit rating agency A.M. Best had downgraded the company, with the assessment of having “marginal ability to meet [its] ongoing insurance obligations.” Accepting this option meant he may face further premium increases and/or have a plan that is unable to pay out if he eventually needs it. 
  2. He could also accept a settlement offer. Either of those options required drastically cutting the total lifetime benefit that he purchased. 
    1. The first settlement option allowed him to keep the policy in effect at no additional cost, but decreased his total lifetime benefit by approximately 75%. 
    2. The second settlement option reduced the total lifetime benefit by over 90% while providing a small cash payment (<$7,000) as compensation.

If he wanted to start over and buy a new plan with a similar benefit with a different provider, premiums would be much higher than what he originally agreed to due to his advanced age and changes to health status since buying the original policy. There is a possibility that he wouldn’t even be able to purchase a new policy at this point.

There was no good option. This reader is now out of over a decade of insurance premiums and potential compound growth they could have produced.

What can we do to avoid finding ourselves in a similar predicament?

How Do You Assess the Strength and Quality Of An Insurance Company?

I recently covered this topic in my CFP education program. The TLDR version, it’s really hard!

The CFP curriculum suggests that before considering any insurance policy, you should consider an insurance company’s:

  1. Financial strength,
  2. Fairness and promptness in processing claims and,
  3. Ability and willingness to provide service before and after a loss.

That is a great framework in theory. But how do you do it in practice?

Insurance Rating Agencies

There are five different financial ratings firms: A.M. Best Company, Duff & Phelps, Moody’s Investor’s Services, Standard & Poors, and Weiss Research. There is occasionally disagreement between agencies. 

These ratings are difficult for consumers to find. For example, I attempted to check GLIC on A.M. Best’s site. Results are hidden unless you create an account.

When you do find the ratings, they are difficult to interpret. Each agency has a different rating system.

Each are imprecise at best, making understanding any one challenging and making an apples to apples comparison between the agency’s ratings nearly impossible for an average consumer.

For example, in the letter sent to the reader it stated that A.M. Best dropped Genworth’s rating to C++. Taking a closer look at A.M. Best’s rating system, this means their “financial strength is vulnerable to adverse changes in economic and underwriting systems.”

Most people assume an insurance policy is a 100% guarantee we will be compensated in the event an adverse insured event occurs. What does “vulnerable” mean? If the idea is purchasing a guarantee, is anything greater than 0% acceptable to you when buying a policy?

The ratings also can be wrong and they could change. For example, the letter the reader shared with me states that A.M. Best “downgraded its rating of GLIC’s financial strength.” So by definition at some point they were rated above C++.

Assume you can wade through the rating systems to make a fully informed decision today. You can buy a LTC policy or deferred annuity with a highly rated insurance company today. But circumstances can be completely different in 5, 10, even 20 or more years when you actually need to collect on the policy.

Assessing Customer Service

We’ve established that assessing a company’s financial strength is difficult. Assessing their customer service is equally challenging. 

I searched Consumer Reports and tried general internet searches to find other unbiased sources of insurance company service reviews. My attempts were fruitless.

We often rely on a trusted insurance agent to help us find the best policy. But insurance is a commission based business. Agents are typically paid the most for plans that are not in your best interest.

There is a tremendous conflict of interest. It’s like asking your barber if you need a haircut.

Consumer Reports says “term life (insurance) is a better deal for most families.” The same article stated that whole life insurance premiums result in larger commissions for insurance salespeople. 

So what products are most common? According to the American Council of Life Insurers, only 40% of life insurance policies sold are term policies, while 60% are whole life policies.

In a more egregious recent example of perverse incentives, the SEC fined Ameriprise and their affiliate RiverSource $5 million. The fine was levied because they were found to have “implemented a sales practice that caused exchange offers to be made to holders of variable annuities to switch from one variable annuity to another which had the effect of increasing sales commissions for RiverSource employees, while also increasing RiverSource’s variable annuity related revenues.”

Again, assume you are able to navigate these conflicts successfully. Assume you manage to buy a deferred annuity or LTC insurance policy from an insurer with an outstanding reputation for customer service today. 

You may not need their service for another decade or more. Things can change considerably by then.

State Guaranty Funds

One protection that consumers do have are state guaranty funds. These funds of U.S. states and territories will step in and pay claims in the event that an insurer becomes insolvent.

However, there are stipulations. Insurance companies pay claims only if they are licensed in that state.

It is also important to recognize that states cap the payments at different amounts. For example, most states cap the amount guaranteed on annuities at around $250,000 per customer, per company. However, outlier states may offer guarantees as little as $100,000 (Puerto Rico) or as much as $1 million (New York).

As this reader’s case demonstrates, a poorly underwritten plan may not actually become insolvent. Instead, the terms may be changed before insolvency occurs, when it becomes apparent than a plan was poorly underwritten.

In cases like that, a settlement may be deemed fair by a court of law. But that does the customer little good if they are left with higher premiums and/or reduced benefits than they were promised.

What To Do?

It is easy to find hard charging insurance sales pitches for any type of insurance. It’s not much harder to find dogmatic advice from bloggers and other financial “gurus” arguing insurance is nearly always a bad deal.

A good starting point before considering any policy is to have a solid understanding of what insurance is and a framework for when insurance products should be purchased. Insurance, in the right amounts and in the right situation, is an appropriate tool to keep in your tool box.

Related: When Should You Self-Insure?

Diversification among asset classes and tax strategies is wise in the face of uncertainty. Insurance is no different.

Diversify between insurance products and self-insuring as appropriate. If purchasing an insurance product, take the time to read and understand your policy.

Also, be aware of state limits to guarantees. Diversify among insurance providers as indicated so as not to exceed state guarantees.

Finally, remember that insurance does not eliminate risk. Purchasing a policy shifts risks from yourself to an insurance company. The vast majority of the time that works out as anticipated.

As I reviewed prior articles on this site on the topics of annuities and LTC insurance, I’m proud of the detailed analysis and balanced approach that has been taken.

However, this case points out the real, even if very rare, case that despite strict state regulation and teams of actuaries on their side, insurance contracts are not infallible. It is one more risk to be aware of.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

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12 Comments

  1. “It’s not much harder to find dogmatic advice from bloggers and other financial “gurus” arguing insurance is nearly always a bad deal.”

    I’m not a blogger or guru but put me in this camp. I self-insure wherever I can and only buy high deductable, catastropic coverage to protect from 5+ figure, low incident losses (long-term care insurance isn’t a low incident situation). IMO, insurance is like the casino where the insurance company is the casio. And as this blog points out, insurance companies can be worse than a casio because at least if you win, the casio pays out immediately so the risk of not getting paid is much less. I’m happy to “lose” to insurance when I do buy but limit my play to as little as possible. Also, collecting on legitimate claims from solvent insurance companies can be very time consuming and frustrating.

    1. Phillip,

      My personal approach is similar to yours, but I hesitate to take quite that hard of a stance against insurance when writing to a broad audience. I would say that you should insure losses you can’t afford to endure. That standard is unfortunately much lower for many people. Being able to self-insure is an under-appreciated benefit of having some wealth built up.

      Best,
      Chris

  2. I love how Genworth was found to be at fault, but all the “solutions” are to the detriment of policy holders, with nothing affecting Genworth negatively. Who the heck determined these “solutions”, a panel of insurance company employees, err, “arbiters”?

    1. Chuck, what wasn’t mentioned here (and likely **wasn’t the scope of the article) is that the beneficiary doesn’t have to go along with the class action settlement. Typically, there is are other options if the beneficiary doesn’t agree with the settlement. You can usually make a statement to the attorneys representing the plaintiffs. In rare cases, you may even be able to attend the court sessions (typically not feasible).

      It is frustrating to hear of another case of insurance not holding up their end of the bargain here.

      1. Dave,

        As far as I could gather from the information shared with me, the only option aside from accepting the settlement was to continue to pay the above agreed upon rates, with no guarantee that they wouldn’t be raised further, to continue with a now downgraded policy.

        I agree it is frustrating to see this happening to people.

        Best,
        Chris

    2. ChuckY,

      I agree that it is frustrating and likely another case of bad behavior, or at the very least bad underwriting, being rewarded because the insurance company is “too big to fail.” Imagine the company becoming insolvent and all of the policies falling to the state(s) that insure them. Still I agree that the meager settlements and downgrade in rating, while not nothing, leaves a really bad taste in my mouth as well.

      Best,
      Chris

  3. Let’s jump to the end. You need to enter into long term care (LTC). You are not able to get along like you use to. Somehow, you are able to get thru the daunting paperwork nightmare to get into an assisted living facility AND get the LTC insurance company to start. You finally get thru the month(s) of deductible, and now starts the aggravation! A statement is sent in for payment, eventually you get an explanation of benefits (EOB). But wait they conveniently missed an item or miss classified or filed it in the wrong department or…. on and on. The insurance company has your money. It is now THEIRS. They WILL deny, delay confuse and refuse to pay anything for as long as they can!!
    Annuity OR Long Term Care – ANY insurance company is going to do absolutely everything they can to not pay out. How long do you think you will be able to keep your mental health.
    The question to answer is WHO is going to make them pay what they owe with out the aggravation??
    I have finally ended 5 years of he** fighting with one. It cost me dearly! If they paid out $1.00 they made sure it cost me MANY times more than that. Never trust an insurance company – EVER!

    1. E,

      I don’t agree with anything you say and your ultimate conclusion is the one Darrow reached in the referenced article, written years ago when policies looked better than they do today due to these underwriting assumptions being too generous. Still, unfortunately, trusting an insurance company is the best (sometimes only) reasonable option aside from relying on Medicaid in their later years. It is an unfortunate case of the people who can least afford these products being those that most need them.

      As I noted in another comment, the ability to self-insure more and more things over time is an important and often under-appreciated aspect of building wealth on the way to financial independence. It not only will leave you with more wealth in more cases than not, it can save the aggravation of dealing with an insurance company if you have the means to simply absorb losses on your own when adverse events do happen.

      Best,
      Chris

  4. After paying 15 years had the same experience with Genworth. Ended up taking a minimum LTC policy and some cash. First, it was that premiums would rise 40% over 3-4 years. Ok, with that. The salesman intimated that this was possible. Then received the second notice, to keep our existing policy (5% compounded, permanent policy) might require premium increases of 493% !!! For us this would amount to over 20k in prems a year. We have significant savings and decided while time was still on our side to stop paying prems, take the cash, rx a possibly small payout when and if we went into LTC. Our parents have lived into late 80s (my parents still alive). Our ROTHs will now be used to self fund LTC, if we actually need it. Unfortunately, we failed to listen to what insurance is meant for eg. Insure an unlikely event. LTC cos. thought this was like term life insurance, to cover a period of time and then drop. Well, older folks are trying to insure for a certain event eg LTC and are not dropping coverage unless threatened with astronomical prems. Don’t think these cos. will survive.

    1. Thanks for sharing your experience Martin. That makes it seem even worse than I was able to ascertain with the information I had available.

      Best wishes moving forward,
      Chris

  5. My own experience with Genworth LTCI completely turned me off to the concept. My parents had policies bought in the late ’90s. Problems were:
    1. Unlike the Veteran’s Administration, Genworth paid nothing for care provided by a family member. They only paid for services provided by complete strangers.
    2. Genworth had a completely outdated definition of “disabled” that they worked to their own advantage to deny claims. Actual coverage was substantially different than written in the policy. My parents disability was Alzheimers, which means they were physically able to travel to get services but mentally disabled. The policy stated it covered “household chores” but when we made a claim for a gardener’s expense to do the yard work my dad did after it was no longer safe for him to operate the equipment, they denied the claim because it was not within the four walls of the “household”. Likewise, any medical services, like for a recurring fungal issue in his toes, would only be covered if the podiatrist came to the house, even though he was perfectly capable of being transported elsewhere. In short, Genworth had many unwritten definitions of what the seemingly clears words in the policy really meant, all aimed at denying claims.
    3. The claims process was a nightmare. The assigned benefit analyst required every “i” and “t” dotted on a complex claim form just exactly the way they wanted to see it or the claim was denied.
    4. They never told us when a claim was denied. With a built-in 60 day delay in their reporting, it was left to us to determine on our own how much money was received versus how much we claimed. Then all discrepancies found required a week of phone tag to the remotely located benefit analyst to find out why.
    5. Just when we had a benefit analyst trained to pay our claims, they switched us to a new analyst and the claim denials started all over again.
    6. Genworth acted like every claim dollar paid was the last dollar they would ever make.
    7. As a potential policy holder, you have to seriously consider who is going to arrange for all the required services and manage the claims process on your behalf. Remember, you’re disable so it won’t be you. You’ll need somebody very capable, persistent, and with lots of spare time on their hands. The burden will be substantial on whoever (usually a family member) is assigned the task.
    8. There’s no limit on premium increases and, unlike life insurance, after having paid premiums for years, your LTCI policy can be cancelled with no refunds by the insurance company board of directors just deciding one day they no longer want to be in that business.

    1. Wow! I’m sorry to hear that Jim.

      I assume that insurance companies being solvent is a relatively rare risk due to strict regulation. I fear the risk of constant stress and headaches due to poor customer service and playing with legalese to deny claims on endlessly complex policies like you report is far more common. I think this is a bigger risk to think about when considering an insurance policy, and one that is not discussed often enough.

      Thanks for taking the time to share your experience to help other readers.

      Best,
      Chris

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