Margie Barrie, a veteran long-term care insurance (LTCI) agent, marketer and educator, has been writing articles about long-term care planning and related issues for years. Even if you now focus more on offering life insurance and annuities than on selling stand-alone LTCI, you may have clients with stand-alone LTCI coverage. You might have LTCI coverage of your own.
Here, Margie Barrie shows how she would handle a question about past, present and future LTCI rate hikes.
Q. The topic of rate increases must be part of the conversation when I work with clients. When they request more details, how should I explain the reasons for past rate increases and the probability of future increases?
A. Our clients need to be told to expect rate increases and to understand the reasons why. As long as rate increases occur, we will probably see negative articles in the press. So, it will be helpful if our clients understand the challenges that actuaries and carriers encounter when setting rates.
The information below is from several sources: first, from my own presentations both to clients and speaking at industry events, and second, I consulted with two other LTC planning veterans for their input — Gene Cutler at ACSIA Partners and Bob Staerk with LTC Global.
This article is divided into three parts: why the rate increases have occurred; why the rate increase situation should improve; and what to say about the future possibility of rate increases.
Why the Rate Increase Have Occurred
Compared to other kinds of insurance (ex. car, home, health), LTC insurance is relatively new. When products appeared on the market in 1980’s, actuaries didn’t have much reliable historical claims data for establishing rates. So, they made some assumptions. Some were correct, but some were not. And it was those that have resulted in the reasons for rate increases.
Particularly hard hit by rate increases are the books of business written before 1996 and prior years. Rate increases are occurring on older policies for the following reasons:
1. More people are keeping their policies than expected resulting in more benefits being paid.
When actuaries started pricing LTC policies, they based their calculations on the senior market of Medicare supplements. Therefore, LTC was initially priced based on the Medicare persistency rate of 93%. That means that 93% of the policy holders will keep their coverage and 7% will drop them. Carriers make more money when a person drops their coverage because they have received the premiums for a period of time but don’t have to pay claims.
The problem occurred when the carriers realized that people really value this protection and don’t drop their policies. Now LTC policies are being priced for almost 100% persistency.
2. Length of claims.
Claims are lasting much longer than initially assumed. People are living longer as a result of healthier lifestyles and medical advances. And there has been an unanticipated surge in senile dementia and Alzheimer claims. For example, the average need for LTC for those with Alzheimer’s is from six to eight years and can be as long as 20.
One carrier reported that for one client with Alzheimer’s, she paid several thousand dollars in premiums before needing LTC. They have now paid almost $2 million in benefits.
3. The cost of 5% compound pricing and lifetime benefits.
Many of the policies seeking rate increases have these two benefits. The cost of sustaining these is higher than actuaries had initially anticipated.
4. NAIC accountability regulations.