There’s a great deal of publicity now about large rate increases on long-term care insurance policies. Rates are now far higher than they were before the year 2000. Why has this happened?
The long-term care insurance industry is less than fifty years old, and first grossly underpriced its products for four major reasons. First, it assumed the high interest rates of the eighties and nineties which would give it high investment returns on the premiums it collected, but interest rates have become very low. Second it assumed high lapse rates, but lapse rates have been under 1 %, so more policyholders become old and claim benefits on their policies.
Third, claims have been higher and of longer duration than originally thought. And finally, for these three reasons, regulatory agencies have forced insurance companies to increase their reserves for claims and have insisted the reserves be invested conservatively.
The insurance companies have to seek approval from State departments of insurance for rate increases. They must justify the need for additional funds to pay claims, not to administer the policies or make a profit. This as been easy to do for the older underpriced policies, and some of the rate increases have been very substantial.
No one likes these rate increases, and in many cases, they were entirely unexpected when the policies were bought. Many policyholders still want the protection that long-term care insurance provides. They don’t want to lapse their policies after paying premium for many years. They have accepted these increases and have kept their policies intact or have reduced benefits to cushion the blow of the rate increases.
With these rate increases, the premiums today are far different than what they were some twenty years ago. They more accurately reflect current interest rates, lapse rates, claims intensity and reserve requirements. In addition, insurance commissioners have set rate stabilization guidelines for the industry to follow.
The result is that the rates of today are less likely to have substantial increases, if any. In addition, there are many products available now where the rates are guaranteed not to increase. It’s a far more stable suite of products, with a far greater degree of certainty for the buyer.
By Louis H. Brownstone