Understanding LTCi rate increases

Q. During the client appointment, I need to explain about rate increases – why they occurred and the future probability. How do you handle that conversation so that the prospect understands the reasons and still feels comfortable buying this product?

A. Understanding why rate increase have occurred is the first step. For that information, I turned to Jim Glickman, president and CEO of LifeCare Assurance Company and a past chairperson of the Long Term Care Section of the Society of Actuaries.

Jim identified four reasons:

1. The low interest rates we are now seeing.

Carriers expect to earn a certain amount from their investments. If they can’t, that presents a problem. 

2. Low lapse rates.

Carriers that have been selling long-term care (LTC) policies since 1990 believed that lapse rates would be much higher. It is now under 1 percent — which is unknown for any other insurance product. A lapsed policy is more profitable for insurance companies because they have received the premiums, but when the policy lapsed, they do not have to return any cash values (as they would with life insurance).

3. Rate Stabilization Legislation. 

This legislation went into effect in 2002. Rate stabilization changed the minimum loss ratio requirements — usually 60 to 65 percent — to a requirement that policies be priced very conservatively. The law also includes an explicit provision for moderately adverse experience and a significant penalty to the insurer if a future rate increase is ever needed.