August 28, 2011

LTC Buyers Choose Higher Premiums Over Limited Benefits

Upheaval in the long-term care (LTC) market has drastically increased premiums and reduced consumer choice. In the last couple years, many LTC carriers left the market or dramatically increased their rates when they discovered that they had dramatically underpriced coverage.

MetLife, for instance, eliminated its long-term care insurance products at the end of 2010, saying that interest rates, among other things, made the product line impossible to continue. At the same time, John Hancock announced that it was raising premiums on in-force policies by 40%.

Carrier pullback from LTC insurance couldn’t come at a worse time, as baby boomers start to qualify for Medicare and Congress threatens deep cuts to entitlement programs.

A recently released Government Accountability Office (GAO) study provides some insight into the LTC insurance marketplace, and may signal a re-entry strategy for exiting carriers. The study examined the federal long-term care insurance program (FLTCIP), which has offered long-term care insurance to federal employees and retirees since 2002.

The most important finding of the study is that a majority of employees will take a rate increase over benefits reduction when offered the choice. Only 1.6% of FLTCIP enrollees chose to discontinue their coverage in the face of premium increases. This result shows that consumers understand the importance of LTC insurance and are willing to pay the increased premiums required by carriers who choose to stay in the market.

John Hancock Life Insurance Co., the carrier at the center of the study, was awarded the FLTCIP contract in 2009. After the first year of its contract, John Hancock amended its actuarial assumptions when it found that participants were living longer than expected and were maintaining their coverage longer than John Hancock had assumed.

Exit is not the only option for LTC carriers. Consumers understand the importance of LTC insurance and are willing to pay for the benefits they understand they need.

Conclusion

Record low interest rates will be a threat to LTC carriers for the foreseeable future. Fed Chairman Ben Bernanke recently said the Fed is likely to keep interest rates near zero for the next two years, which may result in another exodus of carriers from the long-term care insurance marketplace.

Consumer choice in LTC insurance is decreasing just as baby boomers reach the age where long-term care is a factor. The likely result is that more people will rely on Medicare for their long-term care needs. But Medicare is a poor substitute for LTC insurance.

Consumers must be reminded that long-term care insurance is an essential component of every asset protection strategy. Medicare can never fill that void. Although aggressive Medicare planning can qualify higher net worth individuals for Medicare, benefits will undoubtedly be reduced as Congress struggles to reduce the deficit.

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See also The Law Professor's blog at AdvisorFYI.

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