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.