The Federal Reserve Bank and other central banks have been working to keep interest rates low for most of the past 15 years. (Photo: Thinkstock)

The Pennsylvania Insurance Department is responding to the prolonged slump in interest rates by cutting the amount of inflation protection consumers have to buy to qualify for the state’s Long Term Care Partnership Program.

To participate in the program, state residents now need to buy coverage with inflation protection equal to the Consumer Price Index or a fixed rate of just 1 percent.

Previously, the state required partnership program participants to get coverage with at least 3 percent of annual inflation protection.

The change took effect Friday, when the department published the change in the Pennsylvania Bulletin.

Related: Higher interest rates and LTCI: What to know

A state partnership program gives a state’s residents an incentive to buy private long-term care insurance, by letting long-term care insurance holders who run out of private benefits get Medicaid nursing home benefits on unusually favorable terms.

The federal government let four states set up long-term care partnership programs in the 1980s. The Deficit Reduction Act of 2005 later let all states offer partnership program options.

The legislation requires qualified policies to provide at least some inflation protection, and some states require 3 percent or 5 percent compound inflation protection for at least some program participants.

Pennsylvania still requires the insurers selling the policies that qualify for the state’s partnership program to offer a 5 percent inflation protection option.

But Pennsylvania has reduced the minimum inflation protection requirement because of the effects of 15 years of low interest rates on long-term care insurers’ investment income.

Insurers invest their assets mainly in high-rated bonds and other types of instruments officially classified as exposing the holders to a low level of risk.

In the past, insurers could use earnings on investments of long-term care insurance premium payments to help hold down premiums.

Because interest rates on high-grade bonds have been so low for so long, insurers have less investment income they can use to hold down premium costs. The impact of low rates has been especially severe on compound inflation protection options and other product features that require insurers to increase benefits payments on a regular basis over many years.

Related:

Federal workers seek long-term care insurance rate hearing

Utah lawmakers pass LTC partnership bill

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