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Long Term Care Insurance: The Policy That Customers Keep

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Long term care insurance policies continue to experience higher levels of policyholder retention than other insurance products-including life, annuities and disability products.

Despite the continued lack of consumer awareness about the need to plan for long term care, their resistance to doing so, and a decline in sales over the past several years, the emerging persistency experience of both individual and group versions of this product has surprised many in the industry.

Over the past 5 years, LIMRA International has partnered with the Society of Actuaries’ Long Term Care Insurance Experience Committee in an attempt to expand the scope of available industry data about lapse and persistency. We hope this will provide additional tools to help the industry better understand the factors that make an impact on LTC insurance performance and profitability.

Chart 2 shows the trend in lapse rates for LTC insurance policies during the periods 1984-1999, 2000-2001 and 2002-2004. Note that lapses have been declining over time, especially for policies that have been in force 10 years or more. Ultimate lapse rates are in the 2% range for the most recent period studied, and for some carriers they are below 1%.

Based on LIMRA/SOA data, the most significant variations in lapse rates were seen by policy form (individual vs. group plans), issue age, daily benefit level and by marital discount offering.

Group policies tend to be purchased by younger buyers who often do not see an immediate need to secure a source of funds to cover LTC expenses. For group business, lapses tend to be high in the first several years. But as these customers age and begin to see the value of the policies, persistency increases dramatically. By year 10, group lapse rates are as low as, or lower than, lapse rates on individual business (see Chart 2). For similar reasons, LTC insurance policyholders over age 50 have higher rates of retention than those under age 50–where most buyers are covered under a group plan.

And the product’s value proposition seems to be an important consideration in predicting future persistency experience for all LTC insurance policyholders. Those with richer benefits (higher daily benefits and larger total maximum benefit amounts) tend to have greater persistency.

For example, individual LTC insurance policies with maximum benefits of under $100 per day had lapse rates more than 1.5 times higher than those of policies with daily benefits of $150 or more. This is likely due to a combination of factors. First, LTC insurance buyers (especially individual insurance buyers) tend to be older and more savvy financially. So they are less likely to suffer from buyer’s remorse–a big issue with other products, like life and disability insurance. And as time goes by, the investment these individuals have made in the policy becomes more significant while at the same time, the prospect of needing care becomes more real.

Like the senior citizen discounts offered by many retailers, marital discounts on individual LTC insurance policies have become popular and prevalent. Married couples are more concerned about the emotional and financial toll of having to care for a spouse later in life. Individual policies sold with a marital discount have experienced lapse rates nearly 30% lower than policies sold without a discount.

And these levels of retention are likely to continue as consumer awareness of the importance of LTC planning increases. The Federal government has helped to promote LTC insurance by offering group coverage to its employees and their relatives. In addition, federal legislation continues to make the product more attractive to customers. The Deficit Reduction Act of 2006 expanded the partnership programs to all 50 states, and promotion of these programs should focus more Americans on their individual responsibility in planning for long-term care. Most recently, the Pension Protection Act of 2006 included language that creates new tax benefits for policyholders who purchase either life or annuity products with a rider to help defray the cost of long term care. These “linked-benefit” or “combination plans” will not be the right fit for all customers, but their promotion and visibility may also help to increase the focus on LTC planning on both producers and their clients. And this is good for all players in the industry.


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