Making The Case For Limited Pay Long Term Care Insurance
First of Two Parts
More insurers are now offering Limited Pay (LP) Long Term Care Insurance and sales are increasing.
Recent in-force rate increases have underscored the value of LP schedules for the consumer, and the regulatory environment for such schedules has become significantly more favorable.
Based on a consulting project I did for a consortium of LTCI companies, 13 jurisdictions were identified that restricted LP LTCI policy configurations in the past. Those jurisdictions would have allowed consumers to purchase a lifetime premium LTCI policy with a configuration that they would not have allowed for a LP LTCI policy.
Of those 13 jurisdictions:
12 have reduced their restrictions.
Nine no longer have any restriction at all.
Two require a shortened benefit period nonforfeiture option for LP policies.
One requires a cash refund on LP policies with five- to 10-year premium periods.
Only one restricts single premium (SP) LTCI (it does not allow lifetime benefits on a SP LTCI policy, but may review that decision in 2003).
There are good reasons for regulators and the industry to work together to expand the market for LP LTCI. However, there are valid regulatory concerns. It is, therefore, important for regulators to learn about this market and insurers practices. Some states require insurers to answer special questions when filing their product for approval. A list of questions is contained in Part 2 of this article.
The national debate continues about the potential of LTCI to help solve our approaching LTC funding crisis. Many people feel LTCI is critical to avoid escalating budget deficits at the state and federal levels. Others feel LTCI is not affordable enough to play a significant role in the financing equation. Clearly, efforts to make LTCI affordable and ethical efforts to broaden the market penetration of LTCI should be encouraged.
A key goal is to spread the availability of LTCI through the worksite, as happened for acute medical insurance. LP LTCI is particularly attractive in the worksite market and will grow more important as worksite sales expand. For multi-state employers, consistent policy design in all states is a significant issue.
. In addition to affordability at the time of sale and expansion of LTCI awareness, there has been much focus on LTCI rate stability. Significant rate increases on in-force LTCI policies continue to be announced, burdening policyholders and raising concern about the industry and the future affordability of LTCI.
Premium increases on existing business can be both a necessity for, and a threat to, the industrys success. Policyholders who bought LP LTCI in the past will continue to be rewarded for their wisdom.
Appropriately concerned about such rate increases, regulators have worked effectively with LTCI industry leaders to produce new model regulations that will contribute significantly to improved rate stability.
The risk of significant future premium increases on business being issued today seems to be greatly reduced, not just because of the new model regulation but also because pricing now reflects more conservative lapse assumptions and a lower interest rate environment. Consumer, agent and regulatory backlash against companies with past rate increases all are contributing to more careful initial pricing. Underwriting improvements, to the degree not converted into lower prices, help to make pricing more sound than has been true in the past.
Nonetheless, the risk of significant price increases remains and is likely to be perceived, by the buying public, to be a bigger threat than it really is. Thus, it behooves LTCI industry leaders and regulators to continue to take steps that will allow consumers to be more confident when purchasing LTCI.
When LTCI policies are guaranteed to be paid up in a specified number of years, they offer price stability that appeals to less affluent people as well as the more affluent. People will stretch their budgets to purchase LP LTCI in order to have such price stability. Those on limited budgets sometimes purchase two policies, one on a 10-pay program, for example, and the other on a lifetime payment approach, to tame the risk of future price increases.
. LTCI policies can help solve our nations LTC financing crisis and the needs of care recipients only if the policy is still in effect when LTC becomes necessary and only if someone knows about its existence and submits a claim.
Regulators and the industry have taken innovative steps to reduce the risk of policy termination before the need for LTC arises, including mandatory portability, third-party notification, unintended lapse while qualified for benefits and contingent nonforfeiture.
Furthermore, evidence continues to emerge that LTCI policies have amazing persistency when compared to other insurance policies. (Note: persistency has been outstanding even on business with significant rate increases.)
Nonetheless, despite persistency in which the industry properly takes pride, it is unavoidable that people still drop their policies. When policies are sold to young people, even low lapse rates become significant over time. Consider a group of 45-year-olds who buy LTCI. Assuming no deaths, if 2% of the people discontinue their policies each year, nearly half of the cohort of 45-year-olds will reach age 75 without their policy. Even if the discontinuation rate is only 1% per year, more than a quarter of the people would no longer have their policy at age 75.
Clearly, despite excellent persistency, interest should be strong in policy provisions that increase the likelihood that policies will still be in force when needed. Indeed, some people who purchase LP LTCI do so partly to protect themselves against the risk that they might choose to discontinue premium payments at some time in the future.
. Some carriers have attempted to address rate stability concerns by guaranteeing that they will not raise premiums for the first three years, five years or 10 years of the contract. However, the real risk to the policyholder of a premium increase is much greater beyond the 10th year than before the 10th year because:
Short-term insurer claims assumptions are more likely to be accurate than longer-term assumptions.
A large percentage increase in the number or length of claims in the first few years is typically less significant than a small percentage change in number or length later on, because the huge bulk of claims occur later on.
It takes time for insurers to identify the trends and prepare filings for rate increases, then obtain approval, announce and implement any premium increase.
Policyholders are likely to be less able to deal with rate increases as they age because they often are reliant on fixed incomes.
As the block ages, there is less time to secure additional income from a premium increase because more policyholders die or enter premium waiver status. Thus, if the policy premium is understated by 10% initially, a 30% to 40% rate increase may eventually be required to compensate for such error.
. LP LTCI policies such as single premium (SP), 10-year-pay (“10-pay”) and paid-up-at-age-65 (“to-65″) policies provide meaningful long-term guarantees once they are paid up. A SP policy is truly “non-cancelable” while a 10-pay exposes the policyholder to premium increase risk only during the first 10 years and only until the end of the first 10 years.
LP policies promote long-term affordability and persistency, in addition to providing rate stability. Paid-up policies premiums drop to zero, providing the ultimate in both affordability and persistency.
A SP policy can never lapse! So, if the cohort of 45-year-olds mentioned earlier were to buy SP, 100% of them would have coverage at age 75. If a 10-pay policy experienced 1% lapse rates, more than 90% of the age 45 cohort would reach age 75 with a policy as compared to less than 75% with lifetime premiums–a tremendous improvement. With a 2% lapse rate each year, the comparison would be well over 80% for the 10-pay policyholders vs. barely 50% for the lifetime premium policyholders.
Clearly, LP policies can make a significant contribution not only to rate stability and long-term affordability, but also to increasing the probability that the coverage still exists when needed.
Furthermore, LP policies reduce some sources of variation between pricing assumptions and actual experience. Clearly, the number of people who will retain their coverage is more predictable and there is less anti-selection in lapsation. Recognizing that deviations between actual persistency and expected persistency have been the primary instigator of in-force premium increases, it seems reasonable to conclude that LP policies would have experienced greater rate stability than lifetime premium policies.
However, insurers need to charge much higher annual premiums for LP policies than for “lifetime” pay because they get fewer years of premium, experience more ultimate claims due to the improved persistency and take increased risk because of the meaningful long-term guarantees. Thus, a LP policy, while improving rate stability, long-term affordability and the likelihood that the policy will be there when needed, increases two other concerns:
1. Insurers ultimate inability to adjust premiums raises profit concerns.
2. Initial affordability is obviously compromised by the higher premium.
Regulators, industry and consumers should work together to make LP policies as affordable as possible at issue, in order to benefit from LP LTCIs favorable characteristics of persistency, rate stability and long-term affordability.
Next week: Regulators concerns with LP LTCI.
is president of Thau Inc., a LTCI consulting and research firm in Overland Park, Kan. He can be reached via e-mail at email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 20, 2003. Copyright 2003 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.