The long-term care industry continues to face a perfect storm. Sales are shrinking, premiums are increasing (especially for women), interest rates remain low, and health care expenses keep rising. If you think it’s only the elderly who are feeling the pain, think again! It’s current and future policyholders as well as the young. How do you "weather" this storm?
Today’s Premium Environment
Why is this perfect storm gaining momentum now? A look at the two categories of long-term care insurance can provide some insight.
- Existing policies. Carriers are scrambling for approval to substantially raise premiums on existing policies – many of which are unprofitable today.
- New applicants. Currently, the premium cost for new applicants is two to three times more than what policyholders who applied 10 years ago are charged. The cost is even higher for women. All carriers now use gender-based pricing models to help offset higher usage by females, who statistically live longer and use benefits at a higher rate than their male counterparts. The average cost difference for women applicants can reach up to 25 percent in some states!
The key driver for premium increases is the low interest rates set by the Federal Reserve in recent years. But other factors enter into the equation.
- Lapse ratios. Carriers assumed 6 to 8 percent of policyholders would allow their policies to lapse and never use the benefits. In reality the lapse rate is only 1 to 2 percent.
- Preservation mentality. Carriers failed to realize how desperate many people are to protect themselves from rising healthcare costs and how aggressively they would cling to their policies to do so.
- Poor underwriting. Some carriers didn’t initially do a good job of underwriting long-term care policies. They were inexperienced with LTCi and had insufficient historical data to guide pricing. As a result many policies were underpriced.
Where you live also impacts premium increases. National media statistics reflect the rate increases reported in most states. Some states, Indiana included, are very active in reviewing insurance carriers’ requests for increases. For instance, the Indiana Department of Insurance has specific tests and data requirements (some related to claims history) that it reviews before permitting a carrier to increase its rates. Even if a state determines a rate increase is justified, it may, and often does, approve a lesser amount.
A Proposed Option for Increasing Premiums
No one wants to pay higher premiums – that’s a given. But rising resistance from state regulators to approve premium increases have forced several carriers to leave the market. Unfortunately, reducing the carrier options isn’t a good solution.
As a result, one of the biggest remaining carriers of LTCi is asking state insurance regulators for permission to fundamentally revise the way it structures premiums. Traditionally, carriers have kept premiums flat for several years followed by a period of double-digit rate hikes. Genworth has a plan before the National Association of Insurance Commissioners to revise premiums annually. While it may take several years before the association gives it the go-ahead, individual states could act more quickly. This compromise approach has the potential to decrease losses to carriers of LTCi while making rate increases less painful for consumers.
What You Can Do Now
The pressure is on to push premiums upward, but there are still things you can do to minimize the impact of rising rates. Discuss the following options with your financial planner or insurance agent/carrier:
- Say goodbye to 100-percent coverage. Policies that cover 100 percent of expected daily costs with unlimited terms are the most expensive. Instead, consider partial coverage and three- to five-year terms. And always include an inflation protection rider!
- Consider buying coverage together. Carriers often discount premiums up to 30 percent when couples apply, receive approval, and accept coverage together.
- Buy state programs. Does the policy you’re considering participate in the Indiana Partnership Plan or a comparable plan in your state of residence? While participating policies in these plans have received state permission to raise their premiums, the increases have often proven to be less steep and less frequent.
Whether you have an existing long-term care insurance policy or plan to purchase one, the bottom line is you’re going to pay more – especially if you’re a woman. But if you compare the cost of LTCi premiums to the potential future costs of long-term care, LTCi is still a bargain. This will be the case as long as the LTCi industry survives the perfect storm and remains affordable to begin with!
Ryan Jeffries, CFP is a Business Systems Manager at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at BedelFinancial.com or email Ryan.