Rising Cost of Long-Term Care Insurance Squeezes Buyers

Low interest rates clip company profits, forcing higher prices to be passed on to consumers

Long-term care insurance rates are up, forcing those looking for coverage to pay more, thanks to low interest rates that have cut investment yields for providing companies.

According to the 2012 price index published by the American Association for Long-Term Care Insurance (AALTCI), current offerings by insurers are between 6% and 17% costlier than they were just a year ago. Jesse Slome, AALTCI’s executive director, said that for every drop of 0.5% in interest rates, and thus on investment returns, an insurer needs about a 15% premium increase to maintain the projected net profit.

Said Slome, “Insurance prices have increased as a result of the historic low interest rates and yields on fixed income investments.” He went on to explain that between 40% and 60% of the funds accumulated by an insurer to pay out on future claims comes from that insurer’s return on investments.

In its annual analysis of the premium cost for the most popular policies offered by 10 companies, AALTCI found that on average, a 55-year-old single individual who qualifies for preferred health discounts will pay $1,720 for $165,000–$200,000 in current coverage. Last year, that same individual would have paid an average of $1,480. That’s another $240 in premiums.

Not only have premiums risen, but the range between the lowest- and highest-cost policies has broadened compared with last year, Slome said. “For the 55-year-old single policy applicant the highest-price policy cost almost 80% more than the lowest priced policy,” he said. “For some categories, the difference was as much as 132%, and no single company always had the lowest nor the highest rate, which is why we stress the importance of comparison shopping.”

AALTCI reviewed policies for single individuals 55 years old, as well as for couples aged 55, 60 and 65, that featured a 3% compound inflation growth factor. Slome pointed out that an inflation factor was important to consider. “You want the value of the benefit you buy today to grow to keep pace with rising costs,” he said, adding that a policy valued at $170,000 for each policyholder would grow to roughly $300,000 in 20 years.

He also mentioned that married couples can opt for policies with a “shared care rider” that allows the combined benefits to be used by either spouse or split between them. "For roughly 15–25% more," he said, "instead of having access to a benefit pool of $350,000, either spouse has access to a combined pool in excess of $700,000.”

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1 Calculations based on: $150 daily benefit selected at inception of plan, 3-year benefit period, 90-day elimination period, 100% home care benefit and inflation growth at 3% compounded annually. Includes spousal discount (where applicable) and preferred health discount (when indicated).

2 Equals available cash value of benefits that would be paid for claim starting at present age (an almost immediate claim). Policies ranged from $162,000 to $200,000 in initial benefits. AALTCI therefore chose the most common factor.

3 Equals available cash value of benefits that would be paid based on 3% annual compound growth of policy benefits.

NOTE: Shared care options vary from company to company. For illustration purposes, AALTCI assumes access to a combined, total pool of funds.

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