What Happens When Initial Rates Are Too Low

Long-term care insurance (LTCI) premiums are changing. Care costs are changing, too. 

We’re seeing premium increases to in-force policyholders and new applicants. Why? Here are some of the factors behind these rate actions and how premiums can change.

Insurance premiums will always cost less than the cost of care

As insurance products go, LTCI is still fairly young. Yes, it’s been around since 1974, but keep in mind that on average people buy this insurance at age 58 and most claims are filed between ages 80 and 85. This means that statistically relevant claims history has taken quite a while to materialize. It is claims history that enables carriers to validate underwriting criteria, product design and pricing.

Back in the 1970s when this insurance was designed, there were no LTCI product models. Assumptions were made about what would happen over the time period between purchase and claim. Several assumptions were based on experience from other insurance products, primarily Medicare and life insurance, as well as care industry practices and costs. 

Insurers set the premium pricing around how many people would need care and file a claim as well as how much money would be needed to pay future claims. Some of the assumptions were correct but several were not: life expectancy, lapse rates, duration of claims and interest rates.

As insurers introduce new products, here are some of the factors considered:

  • How many policyholders will retain their policies?
  • How long will policyholders live?
  • How many policyholders will file claims?
  • How long will the claims last?
  • How will interest rates perform?
  • How much money will be paid out in eligible benefits?
  • How much money is required in reserve funds to pay for future claims?

How could we know

These factors have all changed over the 46 years since LTCI was first introduced. For example, if an insurer assumed that 6% of policyholders would cancel their policies before ever filing a claim and only 1% canceled, the carrier is looking at 5% more claims than planned. Whoa! What do we know today? Less than 1% of LTCI policies lapse.

Now assume that the life expectancy was 68.2 years for males and 75.9 years for females back in 1974. Today, the life expectancy for guys age 65 is 83.2 years and for gals age 65 it is 85.7 years. Who knew that we could live so long? 

We do know that the longer we live the more likely it is that we will need some level of assistance. Again, more claims than planned.

Now consider that we’re not as healthy as we used to be. But the miracles of medical science are keeping us alive longer. Perhaps with a lessened quality of life and needing more assistance. Yet again, more claims than planned. Today, the majority of claims last about four years. This includes all care venues. Care may begin at home and escalate to assisted and/or nursing home care.

And then there is dementia including Alzheimer’s disease. The average length of care increases to six to eight years and can last much longer.

Interest rates … how low can you go

When these products were designed, interest rates were much higher. Insurers planned their earnings from policyholder premiums based on 6% even 7% interest rates in effect at the time. Today rates are half or less of these planned returns which are invested to maintain reserve requirements. Pretty challenging to maintain reserves when returns on investments are so low. How much interest do you make on your money market account?

Other issues include the additional risk to insurers of policies with 5% compound inflation and lifetime coverage, the development of assisted living communities, and unisex premium pricing. These are just some of the unknowns in the 1970s when LTCI was designed and what has led to the rate increases that policyholders experience today.

How insurers increase your premium

They can’t without approval from the insurance commissioner in the state in which you purchased your policy. Insurers must submit an actuarially justified business case to the insurance regulators in every state where they have reason to increase premiums. 

Rate increases apply to a group of policies with similar benefits issued within a state. These increases cannot change premiums for an individual’s specific circumstances.

The primary reason behind rate increases is the carrier’s loss ratio which is based on claims history. Loss ratios take into account the duration of claims, policyholder longevity, retention of policies, claims paid, reserve pool regulatory requirements, interest rates, benefits paid and more. 

The rate increase information submitted to state regulators includes summaries of premiums received, claims paid, reserve pool regulatory requirements, projected shortages, etc. 

Insurance is regulated by the states and each state may have its own set of criteria for approving an increase. The commissioner can approve, reject or modify the increase requested. 

Insurance remains the best funding option for quality care

Will we continue to see rate increases? Yes. However, policies sold after 2014 have more stable underlying assumptions and respected actuarial firms expect that less than 10% of policies sold in 2014 and later will experience a rate increase. And the increase would be less than 10%. That’s a huge difference in rate stability from the early days of LTCI.

A rate increase presents an opportunity to reevaluate cost and coverage. In our experience, many clients can reduce coverage purchased long ago and still maintain robust benefits with little increase in premiums.

We spend a lot of time talking about premiums. My suggestion is that we change the focus to the quality of care. After all the name of this insurance is long-term care not long-term premium. It’s about the quality of care when we need assistance. 

Families do provide considerable care for loved ones. At great cost – emotional, financial, physical and psychological. Eventually, families turn to formal (paid) caregivers either because the hours of care needed are more than they can handle or the level of care required is beyond what they can provide. 

Caregiving is tough. Often the caregiving turns into coping. That’s why the focus needs to be on the quality of care. The ability to pay for care provided by appropriately trained caregivers is essential to quality care. And care coordination services help those needing care and their families develop a plan for care needs and identify appropriate resources that can implement and manage the plan.