The subject of possible future LTCI rate increases is on the mind of many of those I work with on a daily basis. Since almost all of the major LTCI insurers have raised premium rates on some of their policyholders, it is also fair to ask why rate increases happen in the first place and what to expect going forward?
Here is an outstanding article from the Journal of Financial Planning that answers these questions about LTCI rate increases in a very reasonable way:
“As the long-term-care (LTC) insurance industry continues to struggle in today’s low interest rate environment, a growing number of clients who bought long-term-care insurance in the past are getting notifications of premium increases—and often they’re very significant increases, even from major companies like Genworth, John Hancock, Prudential, and MetLife.
While the rate increase may be a shock, the reality is that in many cases the coverage is still cheaper than it would be to buy the policy anew in today’s marketplace—which essentially means that even with the premium increase, continuing the LTC coverage can be a pretty good deal.
Nonetheless, in some situations the premium increase makes the insurance unaffordable, forcing clients to decide how to modify and reduce the coverage to maintain the original premiums. When such reductions are necessary, most clients should choose to reduce the benefit period, and older clients may reduce the rate on the inflation rider as well; most clients will probably want to avoid reducing the daily benefit amount.
The good news is that given how much more expensive LTC insurance is in the current marketplace, it’s drastically less likely there will be premium increases on today’s new policies. However, it’s still necessary to properly deal with and navigate the rate increases that are occurring on coverage purchased years ago.
How Rate Increases Work
Qualified long-term-care insurance (eligible for tax-free benefits under the Internal Revenue Code) must be guaranteed renewable—meaning as long as premiums continue to be paid, the insurance company must continue the client’s coverage, and they cannot single the client out to either cancel his or her coverage or raise the premiums.
However, rates on insurance that are guaranteed renewable can be increased by going to a state’s Department of Insurance and requesting a premium increase for an entire class of policies, such as “all policies issued to people age 55–64 in the year 1998,” and if your client falls into that group, the client’s rates can be increased.
Given that state insurance departments have to agree to premium increases, which aren’t exactly popular, why do they ever approve them? Because in situations where the premiums are too far below anticipated claims, there’s a risk that the insurance company could be rendered insolvent and unable to fully pay all claims to all policyowners. It’s better to have a rate increase that ensures policyowners get all their benefits than keep premiums in place at the risk of rendering the policies partially or entirely defunct.
Notably, though, what premium increases do not allow is for companies to make up prior losses or increase the premiums so far that the insurance company can make a big profit going forward. Premium increases tend to merely be enough to ensure that the company remains solvent and capable of fully paying all claims for all policyowners. Of course, there is some uncertainty to the projections, so it’s conceivable that the insurance department may approve a rate increase large enough that the insurance company will enjoy some extra profits.
But in practice, the opposite seems to be the case; state insurance departments have been so unwilling to push through premium increases (unless absolutely necessary) that often the increases are huge when they do occur because the insurance company has been undercharging for so many years. Some companies have ultimately had to go back later and ask for another premium increase, because the first increase was so conservative for existing policyowners that it still wasn’t enough to ensure solvency (much less any profits) for the insurance company.
What to Do When a Premium Increase Occurs
Given all the steps involved for an insurance company to get a premium increase approved, what should clients do when the notification arrives?
The good news is there are usually more choices than just “pay the new premium,” or “get rid of the policy.” To give policyowners flexibility in how to handle a rate increase, insurance companies usually offer several options, including:
- Keep the policy as-is and just pay the new premium
- Keep the current premium and reduce the policy’s daily benefit amount to the extent necessary to bring benefits in line with cost (for example, from $250/day down to $200/day)
- Keep the current premium and reduce the policy’s benefit period to the extent necessary to bring benefits in line with cost (for example, from a five-year benefit period down to four years)
- Keep the current premium and reduce the policy’s benefits inflation rate (if the policy included an inflation rider) to the extent necessary to bring benefits in line with cost (for example, from a 5 percent inflation rider down to a 3.5 percent inflation rider)
- Cancel the policy
The bad news is that more choices make the decision more complex. Although not every insurance company and premium increase situation will include all five options—the requirements for what is made available vary by state, and some insurance companies offer more flexibility than others—most companies will offer at least one or two of the options in the middle, in addition to the first and last.
Which choices are most appealing? …….”
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