Financial Insights

What about rate increases for Long-Term-Care Insurance?

We’ve seen some recent rate increase announcements for Genworth Long-Term-Care Insurance (LTCI) policies this month so, if you have a policy, then this may already be familiar.

If you’re not sure what to do when you get a rate increase notice, then have a conversation with your ACM Wealth Advisor because the odds are that they have seen something similar more than once.   We’ve seen folks make decisions on these before they met us and come to regret what they decided later.

If the insurance company for your LTCI policy is sending you a rate increase notice, then they’ve already gone through a process of requesting this through the state insurance commission in the state where you purchased your policy.  Generally speaking, carriers only request a rate increase when the scheduled premiums and projected earnings on those premiums are not enough to satisfy the projected benefits guaranteed for all of the policyholders that bought the same policy as you in the same year that you did.

In other words, the block of policies that you’re a part of isn’t sustainable.  It either requires more premium cash infused to satisfy the benefits policyholders expect in the future or, in combination with this, they need current policy holders to agree to limit or reduce their future benefits.  This is why, in addition to the choice of accepting the rate increase indicated, alternatives are also provided to cap or lower your daily/monthly benefit, or to shorten the benefit period of your policy, or to cap or eliminate the policy’s inflation protection feature going forward.

Trying to decide which of these to choose isn’t always straightforward.  We tend not to make our best decisions when we’re emotional, which is the case when we to have to make a decision that we didn’t expect and which we know is not going to make us happy.

So this is another reason to reach out for some guidance.  The benefits you have may be quite valuable and giving them up after paying premiums for years is typically not the best decision.  It’s also typical that you can’t replace the benefits you already have with a new policy, even if you have to choose among the alternatives provided.  What’s best for you depends on your overall financial situation and the role that LTCI plays as a source of funding for potential long-term-care expenses as part of your overall financial plan.  As a result, it makes sense to have a conversation and revisit this in order to make a decision.

Why are there rate Increases?

Just getting a rate increase notice doesn’t help you to understand why they happen.  The reason that some older LTCI policies end up needing rate increases is a result of actuarial miscalculations made by the carriers and how state regulators monitored pricing of these contracts.  The actuaries initially assumed a certain percentage of policy holders would “lapse” their policies (i.e., drop the policy), which was wrong because most people who bought them did not do so “on a whim”.  Before purchasing the policy, they likely experienced a family member’s long-term-care event and have a first-hand understanding of how important this type of funding can be.

As a result of more policy holders keeping their policies, more of them get used as a result (particularly as assisted-living settings have become more main stream) and so the carrier’s miscalculated on the projected “claims” (the benefits that policy holders use) they expected as well.  They also miscalculated on how to price policies by gender.  Pricing used to be the same for both women and men when the reality is that the majority of LTCI claims are made by women because they live longer (Go Ladies!).  Lastly, if you have a policy that dates back more than 15 years, then the interest rates that carrier’s expected to earn on the premiums you paid ended up being much lower for all the years following the financial crisis (at least up until to the past 12 months).

Based on everything I’ve said so far, and if you are a consumer interested in planning for long-term care, it would seem you have reason to be nervous.  First, you may be wary of future LTCI rate increases  – which is kind of like saying “past performance is an indicator of future performance”.  Similarly, when filling out an application for LTCI today, the state required personal worksheet will list that carrier’s rate increase history, which you may interpret as having a correlation between the past rate increase history of carriers and the pricing of the current product today.

Where we are today

LTC Insurance purchasers should be comfortable that today’s policies are going to remain fairly stable over the lifetime of premium payment.  The two groups responsible for pricing, actuaries and regulators, have made efforts to prevent repeating the pricing mistakes of the past.

From the actuarial side, carriers have dropped lapse rate assumptions effectively to zero.  They also price policies by gender (premiums are higher for women) because women represent the majority of claims.  They also recognize that people live longer and use their LTC policy benefits for assisted living. Carrier interest rate assumptions are also much more conservative today.  Lastly, carriers incorporate a buffer to protect against an adverse experience which might lead to a price increase, because requesting a rate increase on a new policy today effectively ensures, as a result of actions by state regulators, that that block of policies will not be profitable for the carrier.  The result of all of this is that premiums are much higher for a new LTCI policy than in the past.

State insurance regulators have also tried to stop pricing problems on new LTC business by adopting rate stability regulation.  Part of this includes changing how carriers price policies to focus on long-term premium stability instead of using claim “lost-ratios” (like how health insurance is priced).  Any new rate increases must decrease carrier profit levels to pre-determined levels which disincentivises carriers from pursing rate increases (as mentioned above).  Per state regulations, actuaries now must certify the accuracy of their assumptions and that no premium increases are anticipated over the life of the policy (they did not have to do this in the past!).  Lastly, any new policy has to be at least as expensive as older policies with rate increases factored in, which is another way of saying that all the pricing mistakes made in the past have effectively been accounted for in a new policy purchased today and reinforces why premiums are higher today for a new policy than in the past.

It may seem that someone who wants to buy coverage for long-term care expenses has two choices – apply for a hybrid life insurance/LTC policy with guaranteed LTC and death benefits (even if there isn’t a need for life insurance) or buy traditional LTCI coverage with a recurring annual premium and  “budget” for anticipated rate increases based on past history.  Based on where we are today (with actuaries and regulators understanding the pricing mistakes of the past), consumers buying a new LTCI policy today are unlikely to experience the rate increases that older policy holders have had to endure.  In other words, if LTCI makes sense for you in the context of your financial plan, it’s still worth pursuing.  In fact, you’re likely to have a better experience from a premium stability perspective going forward with a new policy now that all of the prior mistakes have been accounted for.

Long-term care planning remains an important part of an overall financial plan for the majority of people today.  For more context on LTCI planning and product options, you can check out our prior posts on Making Sense of Long Term Care Insurance Options and Evaluating Long Term Care Insurance Products.   If you have questions on this topic or want to have a conversation, reach out to your ACM Wealth Advisor.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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