As the long-term care insurance industry continues to suffer—a challenge that won't likely end soon, given ongoing increases in health care costs and continued low interest rates that make it difficult for the insurer to generate a return on premium investments—planners and clients have both become increasingly skeptical about long-term care insurance.
At best, prospective policy owners feel compelled to buy far less coverage than they can afford, just to leave room in case premiums rise in the future, given the quantity of ugly premium increases on existing policies that have occurred in recent years. Yet the reality is that like many industry trends, from low lapse rates to low interest rates to claims patterns were a surprise relative to what insurance companies expected 10 to 15 years ago, they are known facts today.
Accordingly, even the base cost for a new long-term care insurance policy has risen dramatically over the past decade. However, higher pricing—adjusted for the realities of today's marketplace—actually means that while the pace and severity of premium increases on old policies has risen, the risk of premium increases on new policies purchased today may actually be declining. Are planners and their clients becoming most concerned about long-term care insurance premium increases at the time they are actually least likely to occur?
The inspiration for today's blog post is a series of ongoing conversations I've been having recently with some fellow financial planners regarding the viability of long-term care insurance, and in particular about how to craft appropriate long-term care insurance recommendations in light of the industry's current track record for raising premiums. "I'm not even certain what's safe to recommend anymore," a colleague noted, "when companies can come back and raise premiums by 90% after the fact. How can you be certain the policy you recommend today will even be affordable in the future?"
"But is it really appropriate to assume 90% increases on new long-term care insurance policies from here?" I replied, "Or is the reality actually the opposite—that today's premiums are actually less likely to rise in the future?"
Rising Premiums on Existing Policies
In recent years, nearly every long-term care insurance company has had to raise premiums on at least some prior block of their insurance policies, especially those issued 10 to 15 years ago, when policies were priced for the far more favorable interest rates available at the time and before the industry discovered how low lapse rates would be. Although most premium increases are "just" 10% to 25%, some have been much more dramatic, most notably a 90% increase in premiums on some John Hancock policies in Illinois earlier this year.
Ultimately, insurers can only raise premiums with permission from the state insurance department, and each premium increase is approved based upon a specific group of policies—for instance, all policies issued in 2004 on those age 65 to 75 years old. The increase is generally only approved if it is deemed necessary and in the interests of policyholders—essentially, if the premium increase is necessary to ensure that the insurance company will remain viable and capable of paying out claims (after all, while a premium increase is undesirable, an insurance company being unable to pay claims at all is even more undesirable).
Unfortunately, though, because state insurance departments often want clear evidence of an extreme mismatch between premiums and claims before approving a premium increase, and may further delay premium increases in the hopes that current trends will reverse, when the increases do happen, they are often quite severe, as the earlier example noted.
In the second part of the post, I’ll look into the real reasons LTC premiums are rising.