The Changing Landscape of Long-Term Care Insurance

Last December, I wrote a blog about hedging against inflation by using the 10-pay option on long-term care insurance contracts. Long-term care insurance is a hedge in that you use current dollars (premiums) to pay for future costs (benefits paid). If you can front-load the premiums by paying the policy up in 10 years, your exposure to longer-term inflation fears can be mitigated. After all, the insurance company could not raise rates after the 10-year period since you would be done paying premiums. It’s a great idea, but the times they are a-changin’ and that 10-year option is going away.

The inspiration for today’s blog comes from a seminar I am giving this week on the changing landscape of long-term care insurance. To understand the changes, and how my opinion is shifting, you first need to understand the problem-well really, two problems.

Low interest rates. Interest rates are at all-time lows, so insurance companies, just like the rest of us, cannot make as much on their portfolios. This hampers their pricing models since they assumed a higher interest rate on the premiums they take in and invest until benefits need to be paid.

Lapse ratios.
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Insurance companies assume a certain number of policies will be dropped each year. The problem is they guessed high. Long-term care insurance is an emotional product because we are talking about people’s health. People just do not drop this type of insurance very often. Thus, insurance companies are finding that their claims experience is a lot higher than expected and they have not taken in enough premiums to cover what they must pay out.
Because of these problems, there are several large insurance companies that have gotten out of the long-term care business altogether in the last couple years. For the ones that have stayed in, premiums are going up and benefits are being cut. The 10-pay option I mentioned above is one benefit some companies are cutting because they found they had too much risk in not being able to raise premiums in the future. Another benefit that is getting “tweaked” a lot is the inflation rider, since insurance companies have found that trying to keep up with healthcare costs when they cannot earn that much on their bond portfolios is just too tough. This is a loss for consumers.

In my mind, the bottom line is that most people should consider buying long-term care insurance earlier than I might have originally thought, maybe in their early 50s. Buying LTC insurance earlier helps because one way insurance companies can limit their exposure is to tighten underwriting requirements. Buying long-term care insurance earlier in life, when you are still healthy, can make a difference. Second, buying insurance earlier can give you more options in how you structure the benefits to keep the premium within your budget.

The positive in all of this is that premiums have gone up a lot over the last decade, especially in the last two years. This is a good thing because it might just mean that insurance companies finally understand how to price this type of insurance, which will make future premiums steadier. Consumers should want that since we all want the insurance companies to be strong enough to pay claims. I don’t think insurance companies are going to stop offering long-term care insurance. But every time they do a little nip and tuck with policy benefits to help make this type of insurance profitable, they make the policies a little less generous than the ones that came before. In my estimation, these developments probably change the playing field enough that we should all look at long-term care insurance a decade ahead of when most people currently do.

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