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LTCI: Which insureds have the toughest grip on their policies?

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One challenge long-term care insurance (LTCI) issuers have been having is that the policyholders are more likely to hold on to their policies than the issuers had expected.

But, in a new report based on U.S. LTCI experience data from 2008 through 2011, a team at the Society of Actuaries (SOA) and LIMRA has given numbers that suggest that the policyholders with higher persistency rates tend to be the kinds of policyholders that an issuer might have expected to be sticky.

On average, policyholders who went through a full medical underwriting process and those who bought their coverage from career agents seem to be more likely to keep their coverage than other policyholders.

See also: Actuaries choose new LTC future shapers

Actuaries used data from 20 companies with about 19 million covered lives; about 64 percent of the insureds had individual coverage and 36 percent had group coverage. 

About 11.5 percent of the individual coverage and 18.3 percent of the group coverage was written in 1995 or earlier, and 1.8 percent of the individual coverage and 3.6 percent of the group coverage was written in 2010 or later. The most common issue years were 2001, 2002 and 2003.

Actuaries classify an LTCI lapse as “voluntary” if a living policyholder stops paying the premiums for some reason other than death. Actuaries contrast that kind of “voluntary lapsation” with lapsation due to the policyholder’s death.

During the period studied, the average issue age for the individual insureds was 60, and the average issue age for the group insureds was 46. Here are other findings from the report:

  • The overall voluntary lapse rate was 3.6 percent, down from 3.8 percent during the 2005-2007 period.

  • The voluntary individual lapse rate fell to 2 percent, from 2.7 percent in 2005-2007.

  • The voluntary group lapse rate fell to 4.5 percent, from 6.4 percent in 2005-2007.

  • In spite of the decrease in the voluntary lapse rate, the total policy termination rate increased to 4.8 percent, from 4.6 percent in 2005-2007.

“One likely cause of the increase in [the] total termination rate is the aging of the data population,” according to Cathy Ho, the researcher who wrote the report for the research team.

The research team found that, on average, insureds with higher benefits were more likely to keep paying their premiums than insureds with lower benefits, and that insureds who went through a full medical underwriting process were more likely to keep paying.

In the first three years a policy was in force, fully underwritten insureds were only about half as likely to let an LTCI policy lapse as other insureds were. But insureds who bought their LTCI policies through career agents were only about half as likely as other policyholders to let a policy lapse as other insureds.

The research team also found that two opposing forces eventually cause the lapse curves of individual LTCI insureds and group LTCI insureds to cross.

Early on, individual LTCI policyholders are more likely to pay their premiums, and their average lapse rate is much lower than for group plan insureds. In the first policy year, for example, the total termination rate is 12 percent for the group insureds and less than 6 percent for the individual policy insureds.

But, because the individual insureds tend to be much older than the group insureds, death becomes a major cause of individual policy terminations starting around the ninth policy year.

Meanwhile, group insureds seem to start getting serious about paying their premiums after holding their coverage for about eight or nine years.

The result is that the individual insureds have a significantly higher total termination rate than the group insureds every year after the 12th year. In the 20th year, for example, individual insureds have a total termination rate over 8 percent, and group insureds have a total termination rate under 4 percent, according to the SOA-LIMRA data.

See also:

Why that new LTCI experience study matters

LifePlans finds high LTCI claimant satisfaction levels [video]


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