Why Is My Long-Term Care Premium Increasing?

February 26, 2018  |  

Why Is My Long-Term Care Premium Increasing?

Several of our clients have been surprised to learn that the premiums on their old long-term care policies are going up—a lot. We’re not talking about normal inflation here; we’re talking about paying double or triple the original payment. 

This kind of price shock puts policy owners in the uncomfortable position of having to decide between:

  • (a) Paying the new premium
  • (b) Modifying their policy by reducing benefits
  • (c) Surrendering the policy all together.

It can be very stressful to receive a sudden rate increase on top of trying to make the right decision about keeping coverage in place. 

Let’s look at what’s causing this price pressure in the LTC marketplace. In my next post, we will look at the things to consider if you are subject to a rate increase.

Changes in the Long-Term Care Marketplace

According to the National Association of Insurance Commissions, more than half (52.3%) of people turning 65 this year will have a LTC need during their lifetime.  LTC has come to the forefront as medical advances are substantially increasing longevity–at a time of skyrocketing healthcare costs.

Years ago, insurance companies priced LTC policies very cheaply. They greatly underestimated the number of claims they would have to pay out in the future.

A perfect storm of medical advances, high claims rates, and a low interest-rate environment has forced many insurers either to leave the LTC marketplace or face the realization that they need to increase premiums on old LTC policy premiums. 

By law, qualified long-term care insurance (which is eligible for tax-free benefits under the Internal Revenue Code) must be “guaranteed renewable.”  

That means that as long as policyholders are paying their premiums, then insurance companies must continue to maintain policyholders’ coverage. As a result, they cannot single out an individual policyholder and cancel their coverage or raise their premiums.

However, there’s a loophole. By going to a state’s Department of Insurance and requesting a premium increase for an entire “class” of policies—i.e. “all policies issued to people age 55-64 in the year 2003”– rates on insurance that is considered guaranteed renewable can be increased in aggregate. Unfortunately, if you fall into one of those targeted groups of policy owners, your rates can be increased legally.

Premium increases do not allow insurance companies to make up for prior losses, nor can they increase premiums to the point that they can make a big profit going forward. The premium increases are intended to be just enough to ensure that the insurance company remains solvent and can honor claims for all of its policy owners.

That being said, those premium increases can be painful, especially for those on a fixed income.

If there’s any silver lining to this story, considering how much more expensive LTC insurance is in the current marketplace, we’re not likely to see sharp premium increases on today’s new policies going forward. Nonetheless, it’s still necessary to address and carefully navigate the rate increases that are impacting coverage that may have been purchased many years ago.

Key Takeaways

  • Many LTC policy owners are suddenly facing premium increases on their old policies.
  • Increased claims, medical advances, and greater longevity are making insurers’ actuarial tables and forecasting models obsolete.
  • Many LTC insurance companies did not price their old policies properly. Now they’re trying to play catchup at policyholders’ expense.

In my next post, we will explore the decisions policyholders face when they experience a rate increase. We will share a method for fully understanding the costs and benefits of changing one’s LTC coverage.

Contact me  if you or someone close to you is concerned about LTC expenses or recently experienced a premium rate increase.

 

Advisor is not a licensed insurance broker or agency and does not sell or solicit the sale of any insurance products.  Licensed individuals should be contacted for insurance product suitability and policy acquisition needs.

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About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.

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