Headlines the last couple of months pointed to serious problems in long-term care insurance (LTCI). The Wall Street Journal blared: “Long-Term-Care Premiums Soar.” This shortly was followed by news that a major player in LTCI, MetLife, was stopping the sale of new policies.
The first article detailed sharp proposed premium increases on existing policies by Manulife Financial, a subsidiary of John Hancock, and indicated other insurers were implementing increases. The highest and most pervasive increases were from Hancock, and they averaged 40% for 850,000 of its 1.1 million policyholders. The article also reported on a couple who were given notice of a 47% premium increase from Lincoln National.
The proposed Hancock premium increases were a surprise. Hancock went many years without premium increases on existing policies. Most states imposed rate stabilization laws over 10 years ago, reducing some of the volatility of premiums since. The laws require insurers to justify large premium increases by documenting unusual or unexpected circumstances, and state regulators have to approve increases. Because of the laws, not all of these proposed premium increases are likely to go through. The states will hold hearings, and industry insiders believe only a portion of the increases will be allowed.
Several factors are behind the premium increases, and they all boil down to actual experience being different from the assumptions made when the policies were written.
Interest rates are low. Rates and investment returns were much higher when the policies were written. The low returns of recent years led to a significant shortfall of investment income for insurers.
People are keeping their policies. Premiums were determined assuming a percentage of people would pay premiums for a few years then let the policies lapse. Fewer people than expected dropped their policies, and that leads to more claims than expected.
People are living longer. LTC is most likely to be needed by those 80 and older. As that age group increases faster than insurers expected, claims on policies are higher than planned.
Long-term care costs keep rising. Again, these increases exceed what insurers planned.
Some insurers did a poor job of underwriting. They issued policies to applicants without thorough medical reviews, underestimating the true risk that policyholders would file claims for benefits. That is fairly common in the history of LTCI, though it is unusual for a large, experienced LTCI carrier.
The result of all these factors is insurance companies losing money on LTCI, or at least earning a lot less than they expected and can earn elsewhere.
A large, experienced LTCI carrier such as Hancock usually does a better job of avoiding major premium increases. Hancock is the second largest LTCI issuer. It last did a major review of its policy performance in 2007 and raised premiums on some of its existing policies 13%. That was the company’s first increase on existing policies since 1987, according to Bob Gertie of Advisor Insurance Perspectives. Gertie believes most of Hancock’s current problems spring from group policies offered through employers, where the medical underwriting was not as rigorous as for individual policies and the group policies often are purchased by people who couldn’t qualify for individual policies.
MetLife said that because of low returns from LTCI it decided there are better ways to deploy its capital. MetLife will continue existing policies. Other firms that exited the LTCI business in recent years are Allianz and Minnesota Life.
Despite the headlines, you shouldn’t panic and dismiss the idea of purchasing LTCI. I’ve said in the past it’s best to choose only from the most experienced LTCI issuers to avoid problems such as sharp premium increases. Unfortunately, Hancock was among the top issuers and still had this problem. But the other top LTCI companies aren’t going down the same road, at least not yet.
Genworth issued a detailed explanation of its pricing policies and said it plans to hold most premiums firm because of its conservative underwriting and assumptions about earnings and lapse rates. But it did announce an 18% premium increase on two blocks of older policies, stating that the lapse rate on the policies was less than expected.
Not all LTCI issuers are having problems. Gertie also expresses confidence that Guardian, Prudential, and MetLife won’t have significant premium increases. The Wall Street Journal reports that New York Life and Northwestern Mutual have never raised premiums on existing policies.
These episodes re-enforce points we’ve made in the past. Don’t buy the lowest-cost policy; it’s probably underpriced and will impose premium increases down the road. Choose an insurer that’s been in the business for a while, and check its history of premium increases.
To those we add two other criteria. Don’t choose an insurer that does a lot of group or employer-provided LTCI business. Also, buy policies in a new product line. The premiums will be higher than for an older policy line. But the newer policies probably have more realistic pricing and are less likely to face significant increases down the road.
What if you have LTCI and face steep premium increases? You can shop around for a new policy. You’ll need to be medically-qualified, and it’s possible because of your age a new policy will cost more than the old, even after the premium increases.
You could also reduce premiums when staying with the current policy and adjusting policy terms we discussed in past visits such as:
Lifetime benefits. Few people will use unlimited lifetime benefits. Accept a benefit ceiling of somewhere from $1 million to $5 million, or if the policy benefits are in years select a three to five year limit, and your premiums will drop. But you’ll take the risk that you’ll be among the few who need extended LTC.
Daily benefit. Double check the cost of long-term care in your area to determine if the daily benefit in your policy is in line with your policy’s terms.
Elimination period. This is similar to a deductible. It is the period of time you pay for all long-term care before the policy coverage kicks in. Extend this period, and your premiums will fall.
Here are a couple of other steps to consider.
You could purchase one of the hybrid policies, which are life insurance or annuities with LTCI riders. These aren’t for everybody, but can meet the needs of some people. A hybrid life policy is likely to have higher lifetime LTC coverage than a hybrid annuity, and a standalone LTCI usually offers more coverage than one of the hybrids. The hybrids usually require a large single premium. Check the Archive on our members’ web site for details of hybrid policies.
Some insurers will let you pay for a lifetime of LTC benefits over five or 10 years, known generically as a short pay plan. You’ll pay steeper premiums for those years, but it lowers the risk of premium increases.
I don’t recommend reducing premiums by dropping inflation protection. The inflation protection is too important.
Remember LTCI is only about 30 years old. It’s a relatively new and fast-changing industry. You have to expect changes and keep up with them. But the keys to affordable, reliable coverage are the same. Stay with the most experienced insurers who are careful about issuing policies. Adjust your policy terms to find a comfortable trade off between your premiums and the coverage levels.
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