Long-term care insurance (LTCI) premiums are changing. Care costs are changing, too. And, the direction is higher!
We’re seeing premium increases to in-force policyholders and new applicants. Why? Here are some of the factors behind these rate actions and how premiums can change.
As insurance products go, LTCI is still fairly young. Yes, it’s been around since 1974, but keep in mind that on average people buy this insurance at age 58 and most claims are filed between ages 80 and 85. This means that statistically relevant claims history has taken quite a while to materialize. It is claims history that enables carriers to validate underwriting criteria, product design and pricing.
Back in the 1970s when this insurance was designed, there were no LTCI product models. Assumptions were made about what would happen over the time period between purchase and claim. Several assumptions were based on experience from other insurance products, primarily life insurance, as well as care industry practices and costs.
Insurers set the premium pricing around how many people would need care and file a claim as well as how much money would be needed to pay future claims.
These factors have all changed over the 44 years since LTCI was first introduced. For example, if an insurer assumed that 6% of policyholders would cancel their policies before ever filing a claim and only 1% canceled, the carrier is looking at 5% more claims than planned. Whoa! What do we know today? Less than 1% of LTCI policies lapse.
Now assume that the life expectancy was 68.2 years for males and 75.9 years for females back in 1974. Today, the life expectancy for guys is 82.8 years and 86.6 years for gals. Who knew that we could live so long?
We do know that the longer we live the more likely it is that we will need some level of assistance. Again, more claims than planned.
Now consider that we’re not as healthy as we used to be. But the miracles of medical science are keeping us alive longer. Perhaps with a lessened quality of life and needing more assistance. Yet again, more claims than planned. Today, the majority of claims last about four years. This includes all care venues. Care may begin at home and escalate to assisted and/or nursing home care.
These are just some of the unknowns in the 1970s when LTCI was designed and what has led to the rate increases that policyholders experience today.
They can’t without approval from the insurance commissioner in the state in which you purchased your policy. Insurers must submit an actuarially justified business case to the insurance regulators in every state where they have reason to increase premiums.
Rate increases apply to a group of policies with similar benefits issued within a state. These increases cannot change premiums for an individual’s specific circumstances.
The primary reason behind rate increases is the carrier’s loss ratio which is based on claims history.
Loss ratios take into account the duration of claims, policyholder longevity, retention of policies, claims paid, reserve pool regulatory requirements, interest rates, benefits paid, etc.
The rate increase information submitted to state regulators includes summaries of premiums received, claims paid, reserve pool regulatory requirements, projected shortages, etc.
Insurance is regulated by the states and each state may have its own set of criteria for approving an increase. The commissioner can approve, reject or modify the increase requested.
No wonder the costs are movin’ on up. But despite the increasing cost of LTCI, it remains the best funding option to safeguard wealth, preserve assets and maintain standard of living.
If it’s this challenging for insurance carriers to understand all the changing dynamics of long-term care, just imagine how tough it is to figure out cost and coverage on your own.
In next month’s newsletter we will detail our methodical approach to in-force premium increases. There are smart ways to do this and not so smart ways. More to come …
For more information about long-term care and what insurance covers, visit our educational blog, www.LongTermCareInsuranceAmerica.com.