Understanding Long-Term Care Insurance Premium Increases
What is it and how does it happen?
Every so often, insurance companies make the “difficult decision” to increase premium rates for existing traditional long-term care contracts. All insurance is regulated at the state level, which means the state commissioner must approve each class of premium increases. No contract is singled out.
Why does it happen?
Long-term care (LTC) insurance policies are guaranteed renewable, which means the policy will be in place as long as the premiums are paid. One of the provisions of this guarantee is that insurance companies retain the right to increase premiums by classes of insureds. Although its older and more established counterpart, life insurance, has been around for over 200 years, the first LTC policies were sold in the mid-70s in the United States. We now know that the actuarial assumptions used to price these traditional long-term care contracts were way off! These assumptions include the following:
- When policyholders will start to need their insurance benefits and for how long
- How long policyholders will live
- How many policyholders will keep their policies (lapse rate)
- Future interest rates earned on mandated cash reserves
- Amount of eligible benefits that will be paid
Many factors change over the years, affecting the pricing of traditional long-term care insurance policies. Based on updated information, insurers expect to pay higher amounts of benefits than they originally anticipated. Inflation and rising costs of care are among the factors that impact the premium increases as well.
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What are my options?
1. Accept the premium increase
Sometimes the best action is no action. If the increase in premium will not significantly impact your cash flow or goals, then it may be best to retain the policy as is.
2. Freeze the benefits
A common option is discounting premium payments and converting the policy to a paid-up status. This creates a new total benefit amount and locks in your daily benefit amount. This may be the best option if the premium payment is a strain on your cash flow. However, doing so leaves a greater dollar amount to self-insure, should you need it.
3. Compromise – Adjust your coverage
The premium increase notice will include several options to reduce your benefits at a set price point. These options include:
- Shortening your benefit period
- Decreasing your daily benefit amount
- Eliminating various riders
- Decreasing or eliminating inflation protection
Before deciding to reduce your benefit, consult your financial advisor. A comprehensive analysis can inform you of your risk exposure compared to the amount being transferred to the insurance company.
Sources:
CNBC: How to navigate premium increases for long-term care insurance
History of Long Term Care Insurance Carriers
Prince OwusuMensah
Financial Planner
CFP®, BFA™, ChFC®, CRPC®