To make up for early cancellation of benefits payments for 156 holders of New York State Partnership for Long Term Care policies, John Hancock agreed last week to pay a total of $26.3 million.
The settlement includes a $21.6 million in extra benefits to policyholders and beneficiaries, a $2.5 million penalty to the New York State Department of Financial Services, and a $2.2 million payment to the New York state Medicaid program.
When the holders of those policies used less than the full daily benefit amount on a given day, John Hancock failed to roll the unused amount of benefits forward, as described by the policy.
Longtime LTCI sales and marketing specialist Jesse Slome said he had never heard of a similar problem coming to light before. But Slome, executive director of the Westlake Village, California-based American Association for Long-Term Care Insurance, said it's possible that other insurers had made similar mistakes without anyone noticing.
"Traditional long-term care insurance is one of the most complicated (and thus costly) products for an insurer to administer," he said.
Hans Hug, owner of The LTC Insurance Group, an LTCI broker based in Exeter, New Hampshire, found news of the mistake surprising. If similar problems have occurred before without being discovered, one factor might be confusing "explanation of benefits" statements, or EOBs, he said.
"Bad EOB designs are not common," Hug said, "but, when they do show up, problems begin."
Here are nine issues with LTCI policies and coverage emerging from the John Hancock case that insurance agents, financial advisors, clients and other parties should consider, according to these two specialists:
1. Details vary widely, especially on older policies.
Slome said policy provisions varied especially widely before 2010, when the Interstate Insurance Product Regulation Commission began setting LTCI policy standards for participating states.
John Hancock, for example, began selling New York State Partnership policies in the 1990s. It needed an administration system for New York State Partnership policies that was different from its system for other New York state policies, and that was different from its systems for California or Iowa policies.
Other policy administration system challenges include changes in computer technology, staffing constraints and moves to have other companies handle policy administration, Slome said.
2. LTCI clients have different levels of sophistication.
The ability of Hug's LTCI clients to file claims varies.
"Some are all over it and get it, while others give me the deer-in-the-headlights stare," he said.
3. While most LTCI clients don't use up their benefits, it does happen.
One question is whether John Hancock had problems with calculations partly because situations in which policyholders run out of benefits are relatively uncommon.
Hug estimated that only about 20% of his own LTCI clients use up their benefits.
4. Keeping track of LTCI benefits is tricky.
Typical LTCI policyholders have a hard time monitoring benefits payments on their own, Hug said.
To know whether they have received the full benefits owed, they need to understand the mechanics of their policies and read their annual statements.
Once the insureds are on claim, the policyholders need to read to the insurers' explanation of benefits statements closely, he said.
