Surveying Industry Practices On Changes To In-Force LTCI Policies
Over the years, long term care insurance policies have improved tremendously. For instance, much has been written about the demise of the 3-day prior hospitalization provision and post-claim underwriting, the addition of home care and assisted living facility coverage, third-party notification of potential lapse and reinstatement due to unintentional lapse, and other improvements which have swept the industry.
Less has been written about improvements that are not universally available, such as more liberal conditional receipt coverage, monthly home care and shared care.
The above changes, stimulated by changes in the LTC delivery system, company innovation and regulatory leadership, apply to newly-issued LTCI policies. But what have the industry practices been regarding various types of changes to in-force policies?
While the spotlight has been shone on rate increases, little attention has been paid to favorable mass changes that insurers have implemented or on how their practices have affected policyholders whose needs or desires change over time. Given the long time between issue and claim for LTCI, these can be important issues.
Favorable Mass Changes
Individual long term care insurance companies have instituted favorable changes for their existing business in various ways. Some have been implemented solely by company practice without any fanfare, perhaps relying upon alternate plan of care provisions. Others have been announced to agents and brokers.
In some cases, unilateral amendments have been sent to existing policyholders alerting them of liberalizations of policy wording. In other cases, upgrades have been offered to clients willing to pay additional premium for the expanded coverage.
I am aware of the following favorable changes that have been applied to blocks of in-force LTCI policies, but this list is only representative, not comprehensive.
–Adding assisted living facility coverage to policies that had nursing home and home care coverage, but no assisted living coverage when priced. Less frequently, ALF coverage has been added to policies that lacked home care coverage.
–Broadening the definitions of activities of daily living to include stand-by assistance.
–Expanding bed reservation coverage to include reasons beyond hospitalization.
–Lowering existing premiums. (Yes, it has happened!)
–Removing restrictions such as 3-day prior hospitalization as well as inorganic mental and nervous exclusions.
–Upgrading to add home care coverage and assisted living facility coverage.
Note that some of the enhancements listed above can have significant premium considerations. So, for example, if a company added ALF coverage that had not been contemplated in the original pricing and at a later date felt that a premium increase was needed, all parties should appreciate that the rate increase might be entirely attributable to the pro-consumer expansion of coverage.
I feel carriers should be applauded for making such across-the-board improvements even if a rate increase subsequently becomes necessary.
Individual policy changes
Industry practices regarding individual policy changes are less advanced. In some cases, administrative systems lack flexibility to make such changes easy. In other cases, expense-conscious insurers have been reluctant to create complex administrative rules. Lastly, but not insignificantly, carriers might refuse to allow some changes because of profit considerations. They may feel that they under-priced the feature being requested or simply recognize that if the policyholder were to lapse, it would be profitable to the company.
In 2001, a survey regarding policy change practices was sponsored by Milliman, Inc. and New York Life and performed by Thau, Inc. Eighteen LTCI carriers participated in the study.
The study provides insight into the breadth of practices regarding policy changes; the relative frequency of various practices is indicative, but less reliable.
All carriers in that survey allow increases in maximum daily benefit using attained age premiums for the increase, while retaining favorable original age pricing for the original amount. Two-thirds of the carriers allow increases for amounts smaller than their normal minimum size issue.
In general, all carriers handle decreases in risk uniformly. If daily benefit is decreased, benefit period is shortened or elimination period is lengthened, the carriers simply drop future premiums to the cost of the new coverage at the original age. However, carriers have significantly different practices regarding benefit increase riders, as will be discussed below.
Acknowledging that the client forfeits the reserve built up to cover the risk that is dropped, it should be noted that there are several considerations which make such practice acceptable. However, a discussion of such considerations is beyond the scope of this article.
Sixteen of the carriers handled benefit period and elimination risk increases by requiring that the policyholder completely rewrite the policy, forfeiting not only their past reserves, but also their favorable original age premium basis.
Two companies stood out with their favorable treatment of policyholders. One of those companies allows policyholders to pay the greater of the increase in reserve or the accumulated increase in past premiums to lengthen benefit period or shorten elimination period. Original age premiums then apply to the increase in risk as well as the base.
The other company gives an annual discount equal in dollar amount to 5% of all past premiums paid, if an old policy is rewritten to a new policy in order to increase benefit period or elimination period risk. If both the old and new policies have an automatic benefit increase riders (either compound or simple, of at least 5%), the discount is increased to 10%. The discount cannot bring the new premium below the old premium.
Two other companies had discontinued favorable practices. One of them discontinued favorable rules because they were “swamped with time-consuming requests.” I concluded that this particular companys distribution method might have resulted in policyholders not getting good advice at issue.
The other company discontinued its favorable approach when it was purchased by another carrier. Previously, it determined the difference in the attained age premium for the new coverage (longer benefit period or shorter elimination period) over the attained age premium for the original coverage and added that amount to the original premium.
I would encourage the industry to adopt favorable methods to accommodate loyal policyholders. Granted, additional administrative cost is incurred, but it is not great and the frequency should be small, if policies are sold properly in the first place. Paying renewal commissions in all years for the added premium (rather than first year commissions) allows some recovery of expenses and encourages agents to sell the increased risk initially.
Benefit Increase Riders
Adding these riders to existing policies is of particular interest because the lack of a benefit increase rider is likely, over time, to undermine the purpose of the insurance. In that regard, addition of a benefit increase rider is most akin to increasing the maximum daily benefit, a change that carriers handle favorably.
Conceptually, it seems appropriate and simple to add such a rider using attained age premiums. However, nearly half of the companies reported that they do not allow such riders to be added to existing policies.
Furthermore, I had an interesting experience with one of the carriers within six months of having completed the survey. The carrier had responded that it allows benefit increase riders to be added to in-force policies. When their policy was issued by this company, policyholders had been given a policy change form specifically permitting them to request the addition of a benefit increase rider. However, when they requested the addition, the company stated that it had changed its practice for that block of policies.
I believe the many companies that allow benefit increase riders to be added should be applauded. Those companies that do not allow such additions may face problems down the road for the following reasons:
1. The insurance industry in general (consider the individual life insurance business) does allow riders to be added to existing policies.
2. Their agent training material typically does not educate the agent that such additions are not allowed.
3. Their marketing materials do not alert the applicant that such changes will not be allowed.
4. Peer companies do allow such additions.
Given these factors, both agents and clients may have reasonable expectations of being able to add such a rider in the future. At the very least, such companies marketing materials should alert applicants and agents that such additions will not be permitted.
However, I believe the best approach is to allow such riders to be added at attained age rates.
Dropping these riders produces significantly different results depending on the carrier. Seventeen companies identified their practices in this regard. One company incorporates the benefit increase feature into its base policy, hence it cannot be dropped.
The other 16 companies all discontinue future increases and reduce the prospective premium by the amount charged for the rider. However, there are 4 different practices regarding past increases:
a) 5 companies freeze the existing benefit levels (including past increases). That is, past increases are considered to be “paid up.”
b) 3 companies strip off past increases unless the insured is willing to pay for them prospectively at original age rates.
c) 7 companies strip off past increases unless the insured is willing to pay for them based on attained age rates.
d) 1 company strips off past increases unless the insured is willing to pay for them based on year-by-year attained age premiums separately for each past increase.
Consider the following example: A policyholder purchases a LTCI policy at age 65, opting to buy $100 maximum daily benefit for $2290/year with a benefit increase rider rather than paying $1260 without a benefit increase rider. Thirteen years later, when the benefit has increased to $189/day, the policyholder decides to drop the benefit increase rider.
Under a), the policyholder retains the $189/day benefit and the premium reduces to $1260. For the other companies, the premium also reduces but the benefit drops back to $100/day unless the policyholder re-purchases the dropped $89/day.
Under b), if the client is willing to pay 89% of $1260 to purchase the additional $89, his coverage will remain at $189/day, but his premium will become $2381/year.
Under c), if the client is willing to pay 89% of $4275 (his attained age premium) to purchase the additional $89, his coverage will remain at $189/day, but his premium will become $5065/year.
Under d), if the client is willing to purchase the additional $89, his coverage will remain at $189/day, but his premium will fall in somewhere between $2381/year and $5065/year.
Thus, 11 companies charge the client more (many charge much more) to discontinue future increases than to continue to benefit from future increases. Obviously, this makes no sense.
The survey also covered underwriting requirements and compensation for such changes and adding or dropping home care coverage, spousal coverage, or other riders. It also covered lowering substandard extra premiums and exchanges to new policy series.
, FSA, MAAA, is president of Thau Inc., a consulting firm specializing in LTCI strategic planning. He can be reached via e-mail at firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, April 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.