No. 229: Long-Term Care Insurance—Senior Health Insurance Company of Pennsylvania Shows How Not To Handle a Claim

In January 1996, Mary ("Molly") White, an Ohio resident aged 67 at the time, purchased a long-term care (LTC) insurance policy from American Travellers Life Insurance Company (ATL). The company later became Conseco Senior Health Insurance Company, and still later became Senior Health Insurance Company of Pennsylvania (SHIP).

In May 2013, Ruth White, who is Molly's daughter and holds power of attorney for her, filed a claim with SHIP for benefits under the policy. SHIP denied the claim. In August 2013, Ruth filed an appeal with SHIP, which denied the appeal. Since 2013, Molly's mental and physical conditions have deteriorated. Ruth filed additional claims, most recently in October 2016. SHIP denied the claims. In June 2017, Ruth filed a lawsuit against SHIP in state court in Ohio. In July 2017, SHIP removed the case to federal court.

U.S. District Judge John R. Adams is handling the case. President George W. Bush nominated him in January 2003, and the Senate confirmed him in February 2003. (See White v. SHIP, U.S. District Court, Northern District of Ohio, Case No. 5:17-cv-1531.)

The APC Rider
The ATL policy provides for benefits when the insured is in a "Long Term Care Facility" or "Assisted Living Facility." The policy also has a complimentary rider that provides benefits under an "Alternative Plan of Care" (APC) recommended by a physician.

The crux of the dispute is whether the APC rider provides benefits when Molly is at home rather than in one of the above facilities. ATL promoted the APC rider in marketing material. The company said such things as "Unlimited Coverage for Custodial, Intermediate and Skilled Care PLUS Alternate Care Benefits!" It also made it sound as though the APC rider provided a way to receive benefits at home without being admitted to one of the above facilities. The APC rider reads:

If you would otherwise qualify for benefits, we will consider paying for the cost of services you require under a written alternative plan of care. Such alternative care must be a medically acceptable alternative to Long Term Care or Home Health Care.

The alternative plan of care must be initiated by you. It must be developed and written by your physician and consistent with generally accepted medical practices. Those parts which are mutually agreeable to you, your physician and us will be adopted.

Alternative care may include but not be limited to: (1) special treatments; (2) different sites of care; or (3) modifications to your residence to accommodate your needs. Suggested services and benefit levels may be different from, or not otherwise covered by, the policy. If so, they will be paid at the levels specified in the alternative plan of care.

Agreement to participate in an alternative plan of care will not waive any of your rights or our rights under the Policy. However, the total of all benefits paid under this Rider will be an offset to those otherwise payable under the Policy to the extent that is agreed to by you and us in the written alternative plan of care. [Blogger's note: The final sentence above is in boldface type.]

Denial Letters
As mentioned earlier, SHIP denied the claims and appeals that Ruth submitted. For example, in a June 2013 letter to Molly's physician, a SHIP "care manager" said:

In order to evaluate Mary White's eligibility for benefits, we reviewed care plan assessment, care notes, and the results of a recent onsite nursing assessment, have spoken to Ruth White and have determined that Mary White needs assistance with bathing, dressing, toileting, transferring, mobility, and continence.

It is our understanding that Mary White does not desire to receive services in a nursing home setting and wishes to receive care at home. However, Mary White's policy covers Long Term Care Facility or Assisted Living Facility care, only.

In an August 2013 letter to Ruth, the same care manager said it differently. Here are the two key paragraphs:

You requested benefits under your Alternative Plan of Care rider. In order to determine your eligibility, both you and your physician submitted information on whether admission to a nursing home would otherwise be required for your condition, that your care needs can adequately be met at home and a plan of care describing the type of services sufficient to support your care needs at home. We will not pay benefits for any type of Alternative Care unless we are first reasonably satisfied that you would otherwise require nursing home confinement.

We have carefully reviewed the circumstances of your claim, as well as the information your physician submitted on your behalf. Your physician did not recommend nursing home confinement or indicate that you require a level of care that requires nursing home confinement. In addition, we have carefully considered the circumstances of your claim, including the type, level and frequency of care you have received, as well as the reasons you submitted for making this request. We have determined that we are unable to approve your request for coverage of care outside of an eligible Long Term Care Facility or Assisted Living Facility. This denial is based on the lack of proper medical documentation to support the request that covered benefits, under the policy, are not suitable for you.

The Lawsuit
On June 15, 2017, Ruth filed a breach of contract lawsuit against SHIP in the Summit County (Ohio) Court of Common Pleas (Case No. CV-2017-06-2489). On July 20, SHIP removed the case to federal court and filed its answer to the complaint. The next day, the case was assigned to Judge Adams, who immediately issued a case management conference scheduling order. Here are some but not all the elements of the order:

• Judge Adams set the case management conference for July 31.
• He ordered lead counsel and parties with full settlement authority to be present and have calendars available for scheduling.
• He ordered any undue hardship motions or motions to continue to be filed by July 26.
• He ordered, in the event of a motion for continuance, that counsel confer and agree on three alternative dates not later than August 7.
• He ordered the plaintiff to make a settlement offer by July 27, and he ordered the defendant to respond with a settlement offer by July 28.

On July 26, the parties filed a joint report on their planning meeting. On July 27, Ruth filed initial disclosures, a demand for $87,000, plus estimates of $20,000 in attorney fees and $11,300 in costs. The next day, SHIP filed an offer of $17,500. On July 31, at the case management conference, the case was placed on the expedited track. On the same day, Ruth filed additional documents.

SHIP Data
I asked the insurance department in Pennsylvania, SHIP's state of domicile, how many consumer complaints it received in recent years against the company. A spokesman said the department received 25 complaints in 2013, 20 in 2014, 19 in 2015, 26 in 2016, and 11 thus far in 2017.

According to SHIP's statutory statement for 2016, Pennsylvania is the fourth largest state by LTC premiums (after Texas, California, and Florida). By extrapolation from Pennsylvania's 26 complaints in 2016, I estimate there were 300 consumer complaints filed against SHIP in 2016 with all the state insurance departments combined. I think 300 is a large number for a company with capital and surplus of only $28 million at the end of 2016.

In SHIP's statutory financial statements, page 4, line 13 shows "Disability benefits and benefits under accident and health contracts." The figures (in millions) in SHIP's four most recent annual statements are $415 in 2013, $412 in 2014, $414 in 2015, and $309 in 2016. I think the 2016 figure is a sharp drop from the figures in the three prior years.

Long Term Care Group
Long Term Care Group (LTCG) is an LTC insurance administration company. I believe that LTCG administers claims against SHIP. All the SHIP letters I have seen in this case show SHIP at P.O. Box 64913, St. Paul, MN 55164. One of LTCG's locations is in Eden Prairie, a suburb of the Twin Cities. The SHIP/LTCG contract probably says SHIP bears sole responsibility for the claims practices described in this post.

My Inquiry to SHIP
In view of the SHIP data and the LTCG situation mentioned above, I decided to ask SHIP a few questions. I sent them to the New York firm that handles media relations for SHIP. I asked:

1. Is Long Term Care Group handling claims for SHIP? If so, which office of LTCG? If not, who is handling claims for SHIP?
2. Is SHIP in the process of denying all claims? Irrespective of your answer, please indicate the number of new claims approved and the number of new claims denied in 2013, 2014, 2015, 2016, and thus far in 2017.
3. Is SHIP in the process of discontinuing as many previously approved claims as possible? Irrespective of your answer, please indicate the number of previously approved claims discontinued (other than by death of the insured) in 2013, 2014, 2015, 2016, and thus far in 2017.

An official of the media relations firm responded promptly. He said SHIP has no comment on the questions.

General Observations
I am writing about this case because I think SHIP's claim denial letters are outrageous. They are not only gibberish but also seem to conflict with the language of the APC rider. However, I decided not to go into further detail here. Instead, interested readers are invited to obtain the complimentary package I offer at the end of this post. The package contains the ATL policy, including the APC rider, and seven denial letters.

I think the case grabbed the attention of Judge Adams, because he has been moving it along with lightning speed. I hope that the parties settle the case quickly to avoid lengthy delays that would be caused by discovery efforts and a jury trial.

In addition to the White case, I am aware of only two other lawsuits ever filed against SHIP relating to claims practices. I wrote about one of those cases in the May 2012 and November 2013 issues of The Insurance Forum. (See Hall v. SHIP, Superior Court, State of California, County of San Bernardino, Case No. CIVRS 1200996.) I have not written about the other case, which initially was against a SHIP predecessor but eventually involved SHIP. (See Gottlieb v. Conseco Senior Health, U.S. District Court, Central District of California, Case No. 2:11-cv-2203.)

If there were about 300 consumer complaints filed nationally in 2016 against SHIP, it seems reasonable to ask why there have not been many lawsuits. I think the answer is that we are talking about caregivers who are busy tending to the needs of some of our most vulnerable citizens. After the caregiver loses the claim struggle with SHIP, after a state insurance department's consumer complaint division tells the caregiver the insurance department cannot act as the insured's attorney, and after a private attorney approached by the caregiver says a lawsuit against SHIP would be a long legal battle with a doubtful outcome, the caregiver simply gives up.

As I have reported, SHIP is an LTC insurance company in runoff (not selling new policies) and is in fragile financial condition. Indeed, SHIP would have been insolvent at the end of 2016 without a $50 million surplus note on which it has not paid any interest.

Yet the four officers whose names appear on the first page of SHIP's 2016 statutory financial statement appear to be getting by. According to data filed with the insurance department in Nebraska, Paul Lorentz received total compensation of $411,886 in 2016, Ginger Danough $396,423, Barry Staldine $325,403, and Kristine Rickard $239,154.

Available Material
I am offering a 53-page complimentary PDF consisting of the state court complaint (3 pages), SHIP's answer including exhibits (24 pages), seven denial letters (10 pages), the case management conference scheduling order without exhibits (5 pages), Ruth's demand for $87,000 (2 pages), Ruth's preliminary budget estimate (1 page), SHIP's offer of $17,500 (3 pages), and the two articles in The Insurance Forum about the Hall v. SHIP case (5 pages). Email jmbelth@gmail.com and ask for the August 2017 package about the White v. SHIP case.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 228: Stranger Originated Life Insurance—Sun Life of Canada Wins a Partial Court Victory

Sun Life Assurance Company of Canada recently won a partial victory in a lawsuit relating to stranger originated life insurance (STOLI). There have been many STOLI lawsuits, and I have written about a few of them. I am writing about this one because it illustrates vividly the fraudulent nature of STOLI transactions.

U.S. District Judge Pamela Lynn Reeves handled the case. President Obama nominated her in May 2013, and the Senate confirmed her in March 2014. (See Sun Life v. Conestoga, U.S. District Court, Eastern District of Tennessee, Case No. 3:14-cv-539.)

Developments in the Lawsuit
In November 2014 Sun Life filed a lawsuit against Conestoga Trust Services, LLC. The defendant was the sixth assignee of a $2 million life insurance policy Sun Life issued in April 2008 on the life of Erwin Collins. At the time, Collins was a 74-year-old resident of Knoxville, Tennessee. Conestoga acquired the policy in April 2013. Collins died in June 2014, more than four years beyond the expiration of the two-year contestability period. Sun Life sought a court declaration that the policy was void from inception as an illegal wagering contract. In December 2014 Conestoga answered the complaint.

In January 2015 Conestoga filed an amended answer and a counterclaim against Sun Life. In February 2015 Sun Life responded to the answer and counterclaim, and Conestoga filed a motion for judgment on the pleadings. In April 2015 Sun Life opposed the motion. In September 2015 Judge Reeves denied the motion as premature, saying the record was not sufficiently developed for her to determine whether the policy was void from inception as a STOLI scheme, or whether Conestoga was an "innocent bona fide assignee."

In March 2016 Conestoga filed a motion for summary judgment. In September 2016 Judge Reeves denied the motion as moot. In October 2016 Conestoga filed an amended motion for summary judgment, and Sun Life filed a motion for summary judgment.

In January 2017 the parties requested a delay in the proceedings. Judge Reeves postponed the trial, which had been scheduled for March 2017, until November 2017.

The Ruling
On July 12, 2017, Judge Reeves handed down a memorandum opinion and a judgment. Here is the third paragraph of the opinion:

For the reasons that follow, the court finds there was a pre-existing agreement for Erwin Collins to obtain the policy and transfer it to a stranger investor. Therefore, the policy constitutes a STOLI scheme, and under Tennessee law, it violates public policy and is void ab initio. As a result, Sun Life does not have to pay the death benefit to Conestoga. However, Sun Life must refund the premiums to Conestoga so that Sun Life does not obtain a windfall.

The Scheme
Eugene E. Houchins, III (Norcross, Georgia) was the key figure in the case. He was a life insurance broker and president of Bonded Life Company, which he used to procure life insurance policies. He invited Robert Coppock to earn fees by referring elderly persons to him for a program under which those persons would receive money through life insurance policies taken out on their lives. Houchins retained Coppock as a Bonded Life agent. Bonded Life paid Coppock a referral fee of 20 percent of the first-year premium on any completed transaction. Coppock referred Collins to Houchins.

Collins created "The Erwin A. Collins Irrevocable Life Insurance Trust." The trust applied for the policy, and was to be owner, beneficiary, and premium payer of the policy. Houchins worked with David Wolff of Iron Core Capital. Wolff worked with Life Asset, a firm in the secondary market for life insurance policies.

In September 2007 Houchins submitted an informal inquiry to Sun Life about whether Collins would qualify for a Sun Life policy. A week later, Sun Life made a tentative offer subject to a formal application and full underwriting. On November 5, 2007, Ann Collins, the wife of Erwin Collins, signed an application in Knoxville in her capacity as trustee of the Collins trust. A couple of months later, the application and supporting documents were submitted to Sun Life.

In late February 2008 Life Asset told Wolff it would not acquire a beneficial interest in a policy on Erwin Collins because Tennessee was a state where Life Asset would not conduct business. To solve the "Tennessee problem," Houchins had a different trust, with a Georgia address, reapply for a policy. The new application supposedly was signed in Georgia by the insured, by a Houchins friend as trustee, and by Houchins' father as broker/registered representative. Houchins removed references to Tennessee from the policy and trust documents, used a phony Georgia address as the insured's residence, and arranged to have signatures falsely notarized in Georgia. Houchins arranged financing for the initial premium payment, and Sun Life issued the policy.

The Houchins Deposition
On August 4, 2016, a Sun Life attorney deposed Houchins in Atlanta. The transcript shows it was a memorable five-hour deposition. After answering questions about his name and address, Houchins invoked his Fifth Amendment right against self-incrimination in response to virtually all other questions. His attorney, apparently to be on the safe side, instructed Houchins to take the Fifth despite the fact that the statute of limitations had run out on any conceivable crime for which Houchins might have been charged. The facts in the case were developed from documents in the record and the testimony of others. The Sun Life attorney used the deposition questions to enter many documents into the record. To provide readers with a glimpse of what happened at the deposition, I am offering an excerpt from the transcript.

The Houchins Declaration
In addition to the Sun Life lawsuit, there were other cases involving Houchins. They suggest that he was involved with companies other than Sun Life, such as Pacific Life Insurance Company and Phoenix Life Insurance Company, that there was a $2 million Pacific Life policy on Collins, and that Houchins was involved with several trusts other than the Collins trust. Pacific Life filed an interpleader lawsuit in California when it received claims for the death benefit on the Collins policy from not only the Collins trust but also from a firm that had loaned money to the trust to pay premiums on the policy. In the interpleader case, Houchins filed a declaration describing his involvement in the Pacific Life case. To provide readers with his description, I am offering the Houchins declaration.

General Observations
I first wrote in 1999 about what later came to be known as STOLI. I sometimes called it speculator initiated life insurance (spinlife). I have criticized lax underwriting of policies with large face amounts on the lives of elderly individuals. It is difficult to understand how the companies allowed such cases to be approved, considering all the shenanigans that STOLI promoters used.

It should be noted that many STOLI schemes originated during the STOLI heyday before life insurance companies became aware of the full extent of the fraudulent activity. Here are some of the STOLI tactics I wrote about over the years: lying to proposed insureds, telling proposed insureds to sign blank forms, lying to insurance companies about the income and wealth of proposed insureds, coaching proposed insureds about how to respond if companies or inspection firms asked questions, paying accountants and inspection firms to lie in their reports, forging documents, paying notaries to certify forged signatures, lying to banks and premium lenders, paying attorneys to prepare trust instruments and loan documents, destroying evidence, and finding life insurance companies that were willing to look the other way and allow the issuance of STOLI policies.

I think Judge Reeves got it right. Although the Collins policy was well beyond the two-year period of contestability, she declared the policy void from inception. Also, despite the fact that Sun Life had incurred costs, including expenses associated with issuance of the policy and expenses associated with the lawsuit, the judge required Sun Life to return the premiums Conestoga had paid so as to avoid a windfall for Sun Life. In my view, Sun Life had only itself to blame for the lax underwriting that allowed the policy to be issued.

Available Material
I am offering a 57-page complimentary PDF consisting of the Sun Life complaint (12 pages), an excerpt from the Houchins deposition in the Sun Life case (18 pages), the Houchins declaration in the Pacific Life interpleader case (9 pages), the memorandum opinion by Judge Reeves (17 pages), and the judgment (1 page). Email jmbelth@gmail.com and ask for the August 2017 package about the Sun Life/Conestoga case.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 227: Long-Term Care Insurance—A Major Ruling in a Lawsuit against CalPERS

Los Angeles Superior Court Judge Ann I. Jones recently handed down a major ruling in a class action lawsuit against the California Public Employees' Retirement System (CalPERS). The case relates to large premium increases CalPERS imposed on owners of long-term care (LTC) insurance policies.

The Complaints
On August 6, 2013, the plaintiffs filed the original complaint after CalPERS notified them of an 85 percent increase in the premiums for their LTC insurance policies. On January 10, 2014, the plaintiffs filed an amended complaint. (See Sanchez v. CalPERS, Superior Court of California, County of Los Angeles, Case No. BC517444.)

The Parties
The plaintiffs in the original complaint were Alma Sanchez and Holly Wedding. The plaintiffs in the amended complaint are Sanchez, Wedding, Richard M. Lodyga, and Eileen Lodyga. Sanchez is no longer a class representative because of her advanced age and incapacity; she was born July 5, 1925.

The defendant in the original complaint was CalPERS. The defendants in the amended complaint are CalPERS, eight current and former members of its administrative board (Rob Feckner, George Diehr, Michael Bilbery, Richard Costigan, J. J. Jelincic, Henry Jones, Priya Mathur, and Bill Slaton), and the actuaries who initially helped set the premiums (Towers Watson and two predecessor firms).

The Causes of Action
The amended complaint asserts six causes of action: (1) breach of fiduciary duty, (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, (4) rescission, (5) declaratory and injunctive relief, and (6) professional negligence. The sixth cause of action was against Towers Watson, with whom the plaintiffs have settled.

The Defendants' Motion
On March 10, 2017, the defendants filed a motion for summary judgment or, in the alternative, summary adjudication. Here are a few comments (selected and edited) from the defendants' motion:

In accordance with the Public Employees' Long Term Care Act adopted by the California legislature in 1995, CalPERS provides the nation's only self-funded, voluntary, and not-for-profit LTC insurance program. In 1995, LTC insurance was a relatively new product and robust actuarial data were not available to assist insurers in pricing. CalPERS retained a leading LTC actuarial firm, Towers Perrin, and a leading LTC administrator, Long Term Care Group, to assist in designing the LTC program, developing a premium rate schedule, and administering the LTC program.

CalPERS is a government entity, not a for-profit corporation. Accordingly, when it set its pricing, CalPERS did not incorporate a profit margin or the cost of commissions for insurance brokers. In addition, because the LTC program is not subject to insurance regulations, CalPERS enjoyed flexibility in investing the LTC fund.

CalPERS retained Coopers & Lybrand to review Towers Perrin's initial pricing model and provide an actuarial second opinion. Coopers did not recommend that CalPERS make any changes to the premium schedule for the LTC program, nor did Coopers recommend that any changes be made to the pricing assumptions made by Towers Perrin.

The actuarial assumptions used by CalPERS, like those used by the rest of the fledgling LTC insurance industry, did not prove to be accurate. In addition to substantial deviations relating to policy lapse rates and claims experience, financial market crashes in 2002 and 2008 led to premium increases throughout the LTC industry. Many private insurers exited the LTC insurance business: decreasing from over 100 private LTC carriers in 2002 to only about a dozen today. Other private insurers went into receivership. To address this industry-wide problem, CalPERS instituted substantial premium increases in 2003 (30 percent increase) and 2007 (41.7 percent increase), and 5 percent thereafter in 2010, 2011, 2012, and 2013. In early 2013, CalPERS advised policyholders of a further rate increase of 85 percent spread out over two years, beginning in 2015.

The Plaintiffs' Opposition
On April 28, 2017, the plaintiffs filed an opposition to the defendants' motion. Here are a few comments (selected and edited) from the plaintiffs' opposition:

In 1995, CalPERS decided to compete in the LTC insurance market by offering LTC insurance to CalPERS' members and their families. To sell its policies, CalPERS aggressively marketed the program through written materials, seminars, and word of mouth. CalPERS' advertising stated that, as a trusted, non-profit entity, it could offer rates that were 30 percent less than those of commercial carriers. Class Members were also repeatedly told that premiums were "designed to remain level" throughout the life of the program and to enroll at a young age. By 2003, CalPERS' aggressive marketing campaign led to more than 175,000 people enrolling in its LTC program. Compared to private insurance, CalPERS' LTC plan was initially cheaper, provided excellent benefits, and was purportedly managed by CalPERS, who the Class Members thought they could trust.

That trust was misplaced. After several years advising Class Members that the LTC trust fund was a "great success," in 2003, CalPERS announced a 30 percent rate increase for all policyholders as "a direct result of the LTC fund's lower than expected investment earnings related to the prolonged downturn of the stock markets." CalPERS raised premiums again in 2007 and 2010. But in 2013, CalPERS announced that, on top of all other rate increases, it was increasing premiums for LTC policyholders with certain benefits by another 85 percent!

The 2013 rate increase resulted from three failures by CalPERS. First, at the outset of the program, CalPERS mispriced certain policies that included a benefit known as "inflation protection." Second, at the beginning of the program, CalPERS adopted a highly aggressive investment strategy. In 2012, when CalPERS decided to change this investment strategy, it had to increase premiums. Third, CalPERS' pricing model did not include any reserves. In 2012, CalPERS decided to incorporate a 10 percent reserve into its pricing model and that too resulted in increased premiums.

In 1996, CalPERS retained Coopers & Lybrand to examine its LTC program and provide recommendations regarding its investment strategies and pricing. Coopers warned CalPERS that its conduct would likely lead to "criticism that it had 'low-balled' premiums to attract sales, with the intent—or at least willingness—to make future increases." But CalPERS ignored those warnings.

The Ruling
On June 15, 2017, Judge Jones handed down her ruling. She denied the defendants' motion for summary judgment. With regard to the defendants' motion for summary adjudication, she granted the motion as to the first cause of action (breach of fiduciary duty) and the fourth cause of action (rescission). However, she denied the motion as to the second cause of action (breach of contract), the third cause of action (breach of the implied covenant of good faith and fair dealing), and the fifth cause of action (declaratory and injunctive relief). Thus she allowed the case to proceed with three of the causes of action, and the case may go to trial early in 2018.

General Observations
The Sanchez case is reminiscent of a personal experience I had 20 years ago. In No. 144 (posted February 16, 2016), I said I had seen an LTC insurance promotional letter distributed by a predecessor of Genworth. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes to your health." I wrote to the company expressing the opinion that, although the sentence was technically correct, it was deceptive because the company had the contractual right to increase premiums on a class basis. A company officer said he understood my concern, because some companies had increased premiums, but he provided reasons why the sentence was not deceptive. One reason, for example, was that the company had never increased premiums and had an "internal commitment to rate stability." Later I saw a promotional letter virtually identical to the earlier letter except that the company had quietly removed the sentence about which I had expressed concern. I say "quietly" because the company did not inform me it had made the change. Now the plaintiffs in the Sanchez case allege, in paragraphs 35 and 37 of the amended complaint, that CalPERS in 1995 said the premiums for its LTC insurance were "set," the "rates do not increase simply because of age or illness," and the rates are "locked in for the life of your coverage."

I plan to report on the results of the trial. I also plan to report on any settlement agreement that the parties may reach.

Available Material
I am offering a 120-page complimentary PDF consisting of the text of the amended complaint (39 pages), the defendants' motion (33 pages), the plaintiffs' opposition to the defendants' motion (33 pages), and the judge's ruling (15 pages). Email jmbelth@gmail.com and ask for the July 2017 package about the Sanchez/CalPERS case.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 226: The Age 100 Problem—The Achilles' Heel of Life Insurance—Lands in Court

On July 20, 2017, Gary Lebbin and a trust he created filed a lawsuit against Transamerica Life Insurance Company relating to what I have called "the age 100 problem in life insurance." The case involves universal life and illustrates problems faced by elderly insureds. The following paragraph is in the introductory section of the complaint:

2. For decades, life insurance carriers, such as Transamerica, sold permanent universal life insurance policies, marketed as "insurance for life," utilizing outdated mortality tables that did not take into account the fact that Americans were, and are, increasingly living to and past the age of 100. The result has been the improper termination of life insurance policies that were originally sold to policy holders as "permanent insurance." The life insurance industry has left its customers (who faithfully paid their premiums with the expectation that they would have coverage for the remainder of their lives) uninsured. Further twisting the knife, these terminations have exposed customers to adverse tax consequences that are in direct contradiction to the guarantees made when these policies were purchased.

The case was assigned to U.S. District Judge Theodore D. Chuang. President Obama nominated him in September 2013 and the Senate confirmed him in May 2014. (See Lebbin v. Transamerica, U.S. District Court, District of Maryland, Case No. 8:17-cv-1870.)

The Plaintiffs
Lebbin was born in September 1917 in Germany, came to the United States in 1938 to escape Nazi persecution, and married in 1944. His wife died in 2015 at age 97. He has two children, four grandchildren, and seven great-grandchildren. In 1990 he created a trust that purchased two second-to-die universal life policies from Transamerica with a total face amount of $3.2 million. His two children are the trustees of the trust.

The Policies
The policies are second-to-die policies on Lebbin and his wife. Now that she is deceased, the policies are single-life policies. They are based on the 1980 Commissioners Standard Ordinary (CSO) mortality table, in which the terminal age is 100. The terminal age is the age at which the table shows no survivors among insureds. In other words, the death rate in the year prior to the terminal age is 1 (or 1,000 deaths per 1,000 lives). Thus the table is based on the assumption that no one among the insured population survives to age 100. Lebbin will reach the terminal age in September 2017.

Marketing of the Policies
Lebbin says Transamerica represented the policies as "permanent" coverage that would insure him and his wife "for life," that would provide for the "cash value earnings" to grow income-tax-deferred, that the death benefit would be income-tax-exempt, and that "withdrawals (and thus the ability to determine when and if the cash value earnings would constitute taxable income) would be within the control of the Plaintiffs."

I visited the Transamerica website in July 2017. Here is how the company describes whole life and universal life:

Whole life insurance provides permanent protection for life as long as premiums are paid. In addition to guaranteed cash value that you can access through a loan, your loved ones are guaranteed to receive a death benefit. You should expect to pay a higher premium than you would for a term life policy, but your premiums remain the same throughout your lifetime.

Unlike term and whole life insurance, universal life provides an additional level of flexibility. It allows policy owners to modify the amount and frequency of premium payments as long as there is sufficient cash value in the policy to cover monthly deductions. When the insured dies, a guaranteed amount of money, or death benefit, is left to the named beneficiaries. In addition to the death benefit, universal life also contains a cash value. The cash value grows tax-deferred until funds are withdrawn.

The Insuring Agreement
The insuring agreement is the heart of any insurance policy. Here is the full insuring agreement in Lebbin's policies:

While the policy is in force, Transamerica Occidental Life Insurance Company will pay the death benefit to the beneficiary if both Joint Insureds die before the policy anniversary nearest Joint Equal Age 100, or will pay the net cash value, if any, to the owner on the policy anniversary nearest Joint Equal Age 100 if both or either Joint Insured is living on that date. All payments are subject to the provisions of this policy.

The definitions section of the policy says "Joint Equal Age" is "the adjusted age of the Joint Insureds which reflects a risk that would be equivalent to two people of the same age, class of risk, and smoking status." Since Lebbin's wife is no longer living, the policy is now a single-life policy. Here is the effective language of the insuring agreement:

While the policy is in force, Transamerica Occidental Life Insurance Company will pay the death benefit to the beneficiary if the Insured dies before the policy anniversary nearest age 100, or will pay the net cash value, if any, to the owner on the policy anniversary nearest age 100 if the Insured is living on that date. All payments are subject to the provisions of this policy.

Lebbin alleges that, on top of the loss of the death benefit, his (or the trust's) receipt of the cash values of the policies at age 100 will have adverse income tax consequences. I do not know the magnitude of the tax problem because I do not know how Transamerica calculates the amount of taxable income shown on the Form 1099 it sends to the policyholder. Nor do I have access to the statements that Transamerica promised to provide to the policyowner each year.

Extended Maturity Riders
The 2001 CSO mortality table has a terminal age of 121. According to the Lebbin complaint, some life insurance companies—but not Transamerica—offer the option of an Extended Maturity Rider (EMR) for universal life policyholders who own policies based on older mortality tables that have a terminal age of 100. Although EMRs are discussed in actuarial publications, I am not aware of any discussions of EMRs for traditional whole life policies. Here is Principal Life Insurance Company's brief description of its EMR for universal life policies:

If the insured reaches the stated maturity age, maturity is extended to the date of his or her death. The rider is automatically added to policies in states where approved, and there is no charge for the rider. There will be no charges during the maturity extension period. However, loan interest will continue to be charged. No additional premium payments, other than loan payments, will be allowed.

According to the Lebbin complaint, he wrote to Transamerica and asked the company to attach EMRs to his policies. The company declined the request.

The Complaint
The counts in Lebbin's complaint are breach of contract, negligent misrepresentation, fraud (intentional misrepresentation), violations of Maryland's Consumer Protection Act, unjust enrichment, declaratory relief, reformation, and rescission. He requests, among other forms of relief, a declaratory judgment, compensatory and punitive damages, an injunction, reformation or rescission, pre-judgment and post-judgment interest, attorney fees, and court costs.

General Observations
I first wrote about the age 100 problem in 2001, in two articles in The Insurance Forum. I also wrote about the problem in No. 141 (posted February 1, 2016), where I said I was writing to four companies in which my wife and I own life insurance to ask about the problem. Three letters went to policyholder service departments. They did not understand my inquiry. One, for example, sent beneficiary change forms.

The fourth letter went to an executive who understood my inquiry. He said his company writes to the policyholder several months before the insured reaches age 100. The company offers to hold the money after age 100, pay interest on it, refrain from charging further premiums, and pay the money at the insured's death. He sent me a sample letter. It did not address the question of whether the policyholder who accepts the offer would have constructive receipt (for income tax purposes) of the death benefit at the terminal age after having accepted the offer to allow the company to hold the money until the insured's death. The standard company response to the income tax question is to "consult your tax adviser," despite the fact that there is no way a tax adviser would be in a position to answer the question.

It is an understatement to say the age 100 problem is serious. Indeed, I think the problem is the Achilles' heel of life insurance. The bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit. The problem is so serious that, as I said in my second Forum article on the subject, the companies do not want to discuss the matter. I further believe that neither the Internal Revenue Service (IRS) nor the income-tax-writing committees of Congress want to discuss the matter.

Now we have the Lebbin case. It is not a class action; indeed, there is no time for a class action because Lebbin is close to the terminal age. Even if the case survives the inevitable motion to dismiss the complaint, there would be no time for discovery, and there would be no time for a trial. I believe and hope that Transamerica and Lebbin's attorneys will be able to reach a confidential settlement that will solve his immediate problem.

I think the only way to force the industry and other interested parties to address the age 100 problem is to mount a class action. If it survives the motion to dismiss the complaint, and if a class is certified, the parties would have powerful incentives to avoid a trial, and any proposed settlement would be in the public domain.

Available Material
In No. 141, I offered a 37-page complimentary PDF consisting of the two 2001 Forum articles (4 pages), an excerpt from a variable universal life prospectus (1 page), a 2009 IRS request for comments (8 pages), a 2009 comment letter from the American Council of Life Insurers (22 pages), and a 2010 IRS revenue procedure (2 pages). The package is still available. Email jmbelth@gmail.com and ask for the February 2016 package about the age 100 problem.

I am now offering a 54-page complimentary PDF consisting of the Lebbin complaint (20 pages) and an exhibit showing the $2 million Lebbin policy (34 pages). Email jmbelth@gmail.com and ask for the July 2017 package about the age 100 problem.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 225: Genworth Financial—Voluntary Dismissal of a Class Action Lawsuit Filed by Long-Term Care Insurance Policyholders

On December 28, 2016, Erika Leifer and two other long-term care (LTC) insurance policyholders filed a class action lawsuit against Genworth Financial, two subsidiaries, and four executives. The plaintiffs had been notified of substantial increases in the premiums for their policies. The plaintiffs alleged that the premium increases had harmed millions of current and former Genworth LTC insurance policyholders, that the defendants had wrongfully depleted reserve liabilities, and that the defendants had enriched themselves. (See Leifer v. Genworth, U.S. District Court, Eastern District of Virginia, Case No. 3:16-cv-1008.)

The Original Complaint
The situation faced by Leifer, a resident of New York, illustrates what prompted the lawsuit. In September 2002, at age 51, she bought an LTC insurance policy from Genworth Life Insurance Company of New York (GLICNY). The quarterly premium was $500.24. About two years later, she bought another LTC insurance policy from GLICNY. The quarterly premium was $270.40. Here is a paragraph of the original complaint:

26. By letters dated February 20, 2016, GLICNY informed Plaintiff Leifer, now age 65, that the premiums on both of her long-term care insurance policies would be increasing by 60%, and warning that "it is possible that your premium will increase again in the future." In that letter, GLICNY explained that the decision to increase premiums was not based on any change in health or "the current economic environment." Rather, "Our decision to increase premiums is primarily based upon the fact that the expected claims over the life of your policy are significantly higher today than was anticipated when your policy form was originally priced, and as a result, a premium increase is warranted."

I reported on the case in No. 197 (posted January 13, 2017). There I offered readers the 61-page original complaint.

The Motion to Dismiss the Original Complaint
The defendants did not respond to the original complaint. Instead, on March 27, 2017, they filed a motion to dismiss the original complaint. They also filed a memorandum and several other documents in support of the motion. They said the motion was based on the "lack of subject matter jurisdiction (due to a lack of standing)" and "failure to state a claim upon which relief can be granted."

The Amended Complaint
The plaintiffs did not respond to the motion to dismiss the original complaint. Instead, on April 10, they filed a 114-page amended complaint on behalf of 19 policyholders. They are residents of California (2), Florida (2), Maryland, Michigan, New York (2), North Carolina (2), Pennsylvania (5), South Carolina, Texas (2), and Virginia.

Aside from the expanded version of the "parties" section in the amended complaint because of the increased number of plaintiffs, the 58-page "factual background" section in the amended complaint was about twice the size of the corresponding section in the original complaint. Also, there were eight counts in the amended complaint, compared to seven counts in the original complaint. Here are the first and last paragraphs of the expanded "introduction" section in the amended complaint:

1. This case concerns the financial harm caused to current and former policyholders of Genworth long term care ("LTC") insurance policies in the United States, as a direct result of Genworth's deliberate misconduct in wrongfully depleting needed policy reserves—which is the portion of an insurer's revenue held aside to pay future claims—while masking its true financial condition by not disclosing facts required by the National Association of Insurance Commissioners ("NAIC") and statutory accounting fundamentals.

31. Consequently, Plaintiffs, as well as other similarly situated policyholders that comprise the Classes, now seek either restitution, damages for the diminution in their LTC policies' economic value, or damages for out-of-pocket losses incurred by former policyholders who have had to pay higher premiums for new LTC coverage to replace terminated Genworth policies.

The Motion to Dismiss the Amended Complaint
The defendants did not respond to the amended complaint. Instead, on May 22, they filed a motion to dismiss the amended complaint. They also filed a memorandum and several other documents in support of the motion. They used the same reasoning they used in the motion to dismiss the original complaint.

The Plaintiffs' Notice of Withdrawal
The plaintiffs did not respond to the motion to dismiss the amended complaint. Instead, on June 10, they filed a notice of withdrawal of the amended complaint and of voluntary dismissal of the case "without prejudice." That expression means the case can be refiled later. On June 26, the judge endorsed the notice and said "so ordered."

General Observations
Why the plaintiffs dropped the case is a mystery. I asked one of the plaintiffs' attorneys, with whom I am acquainted, for an explanation, but received no reply. I will not speculate on why they dropped the case. I will say I am perplexed in view of the enormous amount of resources that must have gone into preparation of the original and amended complaints.

The dropping of the Leifer case is reminiscent of a class action lawsuit I wrote about in No. 110 (posted July 17, 2014). There the 105-page complaint (and 67 additional pages of exhibits) alleged phony reinsurance transactions with affiliates and participation in a Racketeer Influenced and Corrupt Organizations Act (RICO) enterprise. The lead plaintiffs were Clarice Whitmore, an Arkansas resident who bought an annuity in 2012 from Security Benefit Life Insurance Company, and Helga Maria Schulzki, a California resident who bought an annuity in 2013 from EquiTrust Life Insurance Company. The defendants were Guggenheim Partners LLC, Guggenheim Life and Annuity Company, Security Benefit Life, and EquiTrust Life. The complaint was withdrawn without explanation one day after it was filed. In No. 110, I offered readers the 172-page filing. (See Whitmore v. Guggenheim, U.S. District Court, Northern District of Illinois, Case No. 1:14-cv-948.)

Available Material
I am offering a complimentary 118-page PDF consisting of the amended complaint in the Leifer case (114 pages) and the notice of voluntary dismissal (4 pages). Email jmbelth@gmail.com and ask for the July 2017 package relating to the Leifer lawsuit against Genworth.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 224: Savings Bank Life Insurance Company of Massachusetts—The Plan to Convert into a Mutual Company

On May 19, 2017, James Morgan, president and chief executive officer of Savings Bank Life Insurance of Massachusetts (SBLI), notified policyholders about a plan to buy out the stockholders and convert the organization into a mutual company. He said the board of directors had unanimously approved the plan, and implementation required the approval of a majority of the policyholders who vote on the plan. He said a special meeting of policyholders was to be held on June 28. He urged them to vote in person at the meeting, or by another method. A "Summary Policyholder Information Statement" accompanied the notification letter and described the plan. Policyholders interested in further details were invited to request a more lengthy "General Policyholder Information Statement."

On June 22, 2017, Leslie McEvoy, a policyholder who received the notice, filed a class action lawsuit in state court against SBLI. She also filed a motion for a preliminary injunction blocking implementation of the plan, and she asked for an expedited hearing. The case was referred to Superior Court Justice Mitchell Kaplan. (See McEvoy v. SBLI, Suffolk Superior Court, Commonwealth of Massachusetts, Case No. 2017-1961.)

The Plan
SBLI has 30 stockholders who are savings banks in Massachusetts. SBLI plans to buy back all the shares of Class A common stock for $500 per share and all the shares of Class B common stock for $128 per share, for a total of $57.3 million. SBLI plans to obtain the money by issuing a surplus note (explained later). The Massachusetts insurance commissioner has approved the plan, subject to approval of the policyholders.

The Complaint
The general thrust of the plaintiff's opposition to the plan is that the notice to the policyholders is "grossly defective," that the policyholder vote based on that notice would not be valid, and that the plan should not proceed until SBLI provides an adequate notice. Some of her objections to the plan are mentioned in the first paragraph of the complaint:

Plaintiff is seeking preliminary and injunctive relief related to the imminent vote of SBLI's policyholders — scheduled to occur at a Special Meeting on June 28, 2017 — on SBLI's proposed Plan of Conversion. Plaintiff seeks to enjoin the Special Meeting and block the policyholder vote on grounds that the Notice disseminated by SBLI to its policyholders and holders of annuity contracts eligible to vote, whose affirmative vote is statutorily required to secure approval of the Plan of Conversion, is false, deceptive and misleading. Plaintiff and the Putative Class of its participating policyholders will be irreparably harmed if the Special Meeting is allowed to convene and/or the policyholder vote, which is based on the grossly defective Notice, is allowed to proceed. [Emphasis in original.]

The Alleged Problems
The plaintiff alleges that SBLI's notice is "false, deceptive and misleading" because of several major problems. Here are five of those alleged problems.

First, SBLI has $219 million of net operating losses (NOLs) to carry forward. If the Internal Revenue Service deems the conversion a "change of control" transaction, SBLI may be deprived of a significant portion of the NOLs. The notice did not disclose the likelihood or the consequences of such a development.

Second, the notice did not disclose that Piper Jaffray (PF), SBLI's financial advisor, analyzed the plan and prepared a fairness opinion. The plaintiff alleges that PF said the plan would provide a windfall to the stockholders and adversely affect the policyholders.

Third, the notice did not disclose that the costs of the surplus note may adversely affect the policyholders. A surplus note is a debt instrument that increases the issuing (borrowing) company's surplus because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the issuing company's other obligations, can be issued only with the prior approval of the insurance commissioner in the issuing company's state of domicile, and interest and principal payments can be made only with the commissioner's prior approval.

Fourth, when a stock company issues participating (dividend paying) policies, invariably there are questions about the relative interests of the shareholders and the policyholders in the earnings and surplus of the company. The plaintiff alleges that SBLI's plan will dilute the interests of the policyholders, and that the notice does not adequately address the problem.

Fifth, the notice asserts shareholders have a 37.5 percent interest in SBLI's original surplus. The plaintiff alleges that the assertion is false.

Other Filings
In addition to the complaint, the parties have filed many other documents. Here are a few of them. The plaintiff filed a motion for a preliminary injunction, with a supporting memorandum. SBLI filed an opposition to the motion for a preliminary injunction, with supporting memoranda. SBLI also filed the general policyholder information statement, frequently asked questions, an independent auditor's report, and financial statements.

The Milliman Opinion
SBLI retained Steven Schreiber, FSA, MAAA, of Milliman, Inc., an actuarial consulting firm, to provide an opinion as to whether the proposed plan of conversion is fair to the policyholders from an actuarial standpoint. The opinion, dated January 4, 2017, is appended to the general policyholder information statement offered to policyholders. The plaintiff alleges that the Milliman opinion is "flawed," and that SBLI's use of the opinion in connection with the proposed plan is "irrelevant and erroneous." Therefore the plaintiff alleges that inclusion of the opinion in the general policyholder information statement is "misleading."

The Milliman opinion says it can be used as necessary in connection with the proposed plan, but any other use of the opinion requires Schreiber's consent. I asked him for permission to provide it as part of a complimentary package I plan to offer to my readers. He declined to grant permission, citing "Milliman's longstanding policy of not discussing or distributing client work product."

The Hearing
On June 27, Judge Kaplan held a hearing on the plaintiff's motion for a preliminary injunction. It is my understanding that the judge expressed concern about SBLI's notice in several areas. However, because the special meeting of policyholders was the next day, and because the plan could not be implemented quickly, he decided not to issue an injunction immediately. The reason why the plan could not be implemented quickly is that SBLI has not completed arrangements for the surplus note.

The Special Meeting
On June 28, the special meeting of policyholders was held. It is my understanding that about 60,000 of SBLI's 480,000 policyholders voted, and that about 90 percent of those voted in favor of the plan.

The Order
On June 30, Judge Kaplan issued an order denying the plaintiff's motion for a preliminary injunction. He analyzed the plaintiff's allegations, generally sided with SBLI on them, and said the plaintiff was not likely to succeed on the merits of her allegations. The judge also said that "speed is more important than a carefully crafted explanation of the court's reasoning, so that the plaintiff may consider any other opportunities for the relief she requested."

Reorganizations
Since the early 1990s, most insurance company reorganizations have been demutualizations. In such a reorganization, a policyholder-owned (mutual) company converts into a shareholder-owned (stock) company.

During the same period, some mutual companies have partially demutualized by creating a mutual holding company (MHC). In some such cases, the companies later dissolved their MHCs and demutualized; however, some MHCs still exist. I have expressed the opinion that creating an MHC is contrary to the interests of policyholders.

Prior to the early 1990s, most insurance company reorganizations were mutualizations, in which a stock company converts into a mutual company. An example is Equitable Life Assurance Society of the United States. Originally it was a stock company. However, after revelations in the Hughes-Armstrong investigation of 1905, the company mutualized. In 1992, the company demutualized under the sponsorship of AXA, a French company, and became AXA Equitable Life Insurance Company.

The Provident Case
Provident Mutual Life Insurance Company of Philadelphia, which at the time was an old and highly-regarded company, had an experience about 20 years ago reminiscent of the SBLI case. Provident notified its policyholders that the board of directors had approved a plan to create an MHC. The Pennsylvania insurance department held a hearing, the company amended the plan, the department approved the plan, the company asked the policyholders to vote on the plan, and 89 percent of those voting approved the plan.

However, a group of policyholders had filed a lawsuit in a Pennsylvania state court seeking an injunction blocking implementation of the MHC plan. They alleged that the policyholder information statement omitted important information, and that the policyholder vote therefore was not valid. Two days after the vote, the judge issued a preliminary injunction blocking implementation of the plan. Later the judge made the injunction permanent. Provident eventually scrapped the MHC plan and demutualized under the sponsorship of Nationwide Corporation.

As the Provident case progressed, I wrote extensively in The Insurance Forum about the case; the last major article was in the November 1999 issue. Jason Adkins, the lead plaintiff's attorney in the SBLI case, was involved in the Provident case.

General Observations
In general I agree with the plaintiff's allegations about the shortcomings of SBLI's notice to policyholders. Therefore I disagree with Judge Kaplan's order. In my opinion, the motion for a preliminary injunction should have been granted, the initial policyholder vote should have been voided, SBLI should have modified the notice and sent it to the policyholders, and another policyholder vote should have occurred.

I do not know whether the plaintiff can appeal Judge Kaplan's order or take some other action to seek relief. I plan to report significant further developments in the case, should they occur.

Available Material
I am offering a complimentary 68-page PDF consisting of SBLI's notification letter (1 page), SBLI's summary policyholder information statement (18 pages), McEvoy's complaint (29 pages), Judge Kaplan's order (14 pages), and the article in the November 1999 issue of The Insurance Forum (6 pages). Email jmbelth@gmail.com and ask for the July 2017 package about SBLI's mutualization plan.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 223: Long-Term Care Insurance—Why It Is Wrong for States To Help Private Companies Sell the Product

In May 2017 an Indiana resident shared with me a long-term care (LTC) insurance promotional mailing he had just received. The mailing purported to be from the Indiana Partnership for Long Term Care, but in reality it was from a lead-development company in Texas. I wrote major articles in the July 2008 and January 2012 issues of The Insurance Forum about the California and Indiana LTC insurance partnerships. Here I provide an update and explain why I think it is wrong for states to help private companies sell LTC insurance.

LTC Insurance State Partnerships
LTC insurance state partnerships began in the late 1980s as a demonstration project funded by the Robert Wood Johnson Foundation. The original four states selected to participate were California, Connecticut, Indiana, and New York. Section 6021 of the Deficit Reduction Act of 2005 resulted in the expansion of the program into almost all the other states.

An LTC partnership program affects a state's Medicaid system. When a person buys a "partnership qualified" (PQ) policy, the person receives a one-dollar "disregard" for Medicaid qualification purposes for each dollar of LTC benefits received. For example, if an insured with a PQ policy receives $100,000 in LTC benefits, the insured would be able to keep $100,000 of assets beyond the minimal asset level required for Medicaid eligibility. It is important to recognize there is no "disregard" merely from ownership of a PQ policy. Stated another way, there is no "disregard" until the insured receives LTC benefits. Thus an insured whose claim for LTC benefits is denied by the LTC insurance company would receive no "disregard" for Medicaid qualification purposes.

The AALTCI
The American Association for Long-Term Care Insurance (AALTCI), founded in 1998 and based in Westlake Village, California, describes itself as "the national professional organization exclusively dedicated to promoting the importance of planning for long-term care needs" and "the nation's leading independent organization serving those who offer long-term care insurance and other planning solutions." Its members are agents and companies selling LTC insurance, it provides information about state LTC insurance partnerships, and it offers various services to its members.

When I checked AALTCI's website (www.aaltci.org) in May 2017, I found a list of state partnerships as of March 2014. When I inquired, AALTCI provided a list as of February 2017. The updated list shows for each state the status of enabling legislation, whether the state provides reciprocity with other states, the effective date of the partnership, and whether the partnership is operational. Also, for each state, there is a description of the BIO, which is the benefit inflation protection option.

My Two Articles
I wrote my July 2008 article after The Wall Street Journal carried an article critical of the California LTC insurance partnership. I examined the program, expressed the opinion that the problem of financing LTC cannot be solved through the mechanism of private insurance, and explained the reasons for my opinion. I also expressed concern that the promotional letter was over the signature of the California governor, thus giving the appearance of an endorsement by the state. I wrote my January 2012 follow-up article after seeing a letter over the signature of the Indiana governor promoting LTC and the Indiana LTC insurance partnership.

In both articles I described the mailings and indicated that the response forms were addressed to Senior Direct, Inc. (Rockwall, TX), a private lead-development company. I also said Senior Direct sold the response forms to insurance agents.

The Recent Indiana Package
The May 2017 Indiana package consisted of four items: (1) a one-page letter, (2) a response form attached to the bottom of the letter, (3) a postage-paid-by-addressee reply envelope, and (4) an outside window envelope with no return address. In the upper left corner of the letter were the words "Information Concerning" in small type followed by the words "The Indiana Partnership for Long Term Care" in large type. Next to those words was a partial outline of the state of Indiana. In the upper right corner of the letter was information about nursing home and assisted living facility costs in Indiana, with a footnote indicating that the source of the data was the "Indiana Department of Insurance." The salutation was "Dear Fellow Hoosiers" and the letter was unsigned. Following the text of the letter, the recipient was urged to send back the response form, which was addressed to "SD Reply Center" at a post office box in Rockwall. The response form showed the name and address of the addressee and asked for the person's age, the spouse's age, telephone numbers, and an email address. At the bottom of the response form was a single line of small print consisting of three sentences:

Please verify address. Fill out card in its entirety and mail in the enclosed envelope today. Not affiliated with or endorsed by any government agency.

I sent the Indiana Department of Insurance a copy of the components of the promotional mailing. I pointed out several of the ways in which the package, although in this instance not signed by the Indiana governor, had the earmarks of an endorsement by the state and the Indiana department. I also expressed the opinion that the small-print disclaimer at the end of the one-line note at the bottom of the response card was not enough to offset all the earmarks of an endorsement.

In response, a department official said the state and the department no longer endorse the sale of LTC insurance to Indiana citizens. Further, the official said that the department was launching an investigation of the recent mailing, but that the results of the investigation probably would not be available for some time. I decided to post this item now and prepare a follow-up after the results of the investigation become available.

General Observations
For at least five reasons, it is my opinion that it is wrong for states and state insurance departments to allow themselves to be drawn into efforts to sell private LTC insurance to their citizens. First, as explained in my July 2008 article, the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. Second, many of those who try to solve the problem through private LTC insurance will suffer disappointment in several ways, including large premium increases. Third, the problems have become widely known not only because of substantial premium increases but also by the withdrawal of many LTC insurance companies from the LTC insurance market. Fourth, among the few remaining LTC insurance companies, some have experienced significant declines in their financial strength ratings, and one has been placed in liquidation. Fifth, when a state or state insurance department endorses or appears to endorse LTC insurance, citizens will blame their state government when they encounter disappointment.

Available Material
I am offering a complimentary 11-page PDF consisting of the July 2008 and January 2012 articles in The Insurance Forum (7 pages) and a copy of the recent promotional mailing to Indiana residents with the name and address of the recipient redacted (4 pages). Email jmbelth@gmail.com and ask for the June 2017 package about state LTC insurance partnerships.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com