The Truth About Long-Term Care Insurance Rate Increases

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People who are planning for extended care and are considering LTC (long-term care) insurance often hear about potential rate increases and it scares them! It is true that older traditional LTC insurance policies have had premium rate increases. The question is why and what about policies today? The fact is that actuaries (they analyze the financial costs of risk and uncertainty for insurance companies) mispriced older policies because they had wrong assumptions, but today’s policies are priced to include the prior rate increases and pricing mistakes.

What were these wrong assumptions?

Number 1 – Lapse Ratio

In years past, the insurance companies expected that people who bought LTC insurance would behave similarly to those who bought life or disability insurance. The actuaries expected about 5% of policyholders would cancel their policies each year. However, less than 1% of policyholders cancel their policies each year.

Most people who buy LTC insurance keep it for life and don’t cancel it. This shows you that policyholders see the value in keeping their policies. Today’s traditional LTC insurance policies are now priced with a less than 1% lapse ratio, which is lower than any other financial insurance product.

Number 2 – Claims Data

There are critical assumptions that insurance companies make when pricing premiums for LTC insurance, such as: when people will need their benefits, how long they will need it, and how much will be paid out. If these assumptions aren’t accurately assessed, the insurance company has to make changes to the premiums on existing policies in order to cover expected claims.

Claim assumptions were aggressive during the ’90s as insurance companies tried to maximize market share. Now claim assumptions are very conservative estimates of actual experience, with an additional margin for error. Actuaries know that people are living longer and are having more costly claims. We have much more claims data than we did in the 90s and early 2000s. This means that new traditional LTC insurance premiums are being priced with claim expectations based on credible numbers.

What are some of these credible numbers?

It turns out that claims on older policies were twice as high as actuaries projected and that’s why many policies purchase in the ’90s and early 2000s have had large rate increases (some 80% or even higher).

How long do claims last? When claims last more than 1 year, the average is about 4 years and about 20% last more than 5 years.

Side note: Gender specific pricing – LTC insurance premiums used to do unisex pricing which simply means a single woman paid the same as single man. Today, we have gender specific pricing. At the time of purchasing a policy, women pay more than men (about 30-40% more) for the same benefit amount because generally women use more LTC benefits and stay on claim longer than men do.

Number 3 – A Low Interest Rate Environment

Investment returns for insurance companies is very important and it directly impacts pricing on insurance products, including LTC insurance. Interest rates have been historically low for years, which has made it difficult for insurance companies to grow their reserves to pay claims. Insurance companies typically invest a large portion of their premiums paid by policyholders into products that are low risk like bonds, instead of riskier products like stocks.

Beginning in the late ’80s until 2009, LTC insurance companies assumed that their long term reserve earnings would be 6-7%, but with years of low interest rates, they had to adjust their new premiums and investments. Interest rates are now trending up which helps companies reserve earnings.

Rate Stability Regulation

The good and bad news is that policies bought today cost a lot more than they did years ago, but policies today are priced using very conservative assumptions and it would be extremely unreasonable to expect the rate increases we’ve seen in the past.

If you buy a traditional LTC insurance policy today, are premiums guaranteed to remain the same forever? No. You could still have a rate increase if the company’s claims on the new policies are much higher than projected, but the likelihood of a rate increase is very small, like stated above.

Under the new rules of the Regulation, if an insurance company requests a rate increase, it must decrease the profit levels to a cap predetermined by the Regulation. The rate increase can’t include normal profits, only a small amount to cover admin costs.

This means the Regulation rewards the insurance company with higher profits if they keep premiums level and punishes them if they request a rate increase because they have to lower their profits.

The Regulation also requires insurance companies to include a margin of error or a cushion into their pricing. This is meant to avoid the need for any future premium increases. Prior to the Regulation, companies were not allowed to include any margin for error into their initial pricing.

Many of the rate increases that have happened are on policies that are older and are not covered under the Rate Stability Regulation. You can tell how well the Regulation has worked by looking at the rate increase history of policies sold AFTER the Regulation took effect in your state. Ohio enacted a LTC insurance Regulation on 2/8/2003, so Ohio residents who bought a traditional LTC insurance policy after that date are protected by the Regulation. You’ll find the history of rate increases in the Personal Worksheet of the LTC insurance policy’s application. Newer policies have had no rate increases or small rate increases because the newer policies are much more conservatively priced.

The Bottom Line

Traditional LTC insurance policies issued after the Rate Stability Regulation took effect are a lot more stable than older policies with older pricing. Today’s policies are priced to include the prior rate increases. They provide robust benefits for the lowest premiums paid, plus they can provide asset protection from Medicaid spend down in most states through the State Partnership Program.

If you have a newer LTC insurance policy, don’t buy into the fear that your premiums are going to increase astronomically like older policies have and you won’t be able to afford it. Instead, talk with a LTC insurance specialist. We can explain how companies have addressed this issue and design a meaningful and affordable plan to protect you and your family.

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