This has been the topic of the year, I think. We have had more conversations this year with policy holders on this topic than any previous year. So let me say a few words about rate increases…
First, if you own a traditional (stand alone) long term care policy, you need to plan that these will happen periodically over the life of ownership. If you own a hybrid life/long-term-care, the rates do not change. By contract they cannot. But this is not true on traditional policies.
Years ago (say 10 to 15) sales people said that rate increases were unlikely. Truthfully – and in their defense – the state of the industry to that point bore that out. The industry has been around about 40 years now and for the first 20 to 25 years of that, rates were incredibly stable. The problem? Time and experience.
Remember, most people buy these policies and don’t use them for 20 or more years. So until about year 20 of the industry’s history, the actuarians and underwriters were guessing about claim rates, lapse rates and interest rates. 20 years into the process, though, they had hard data on these items and have learned they were vastly underestimating required premiums. The upshot? Rate increases… Several things impacted this.
1) Higher than expected claim rates: first, fewer people lapsed their policies than they thought would do that. Second, advances in medical science have kept people alive (and needing care) from conditions which were once terminal. Lastly, we are living longer and, frankly, the longer you live the higher the likelihood of needing care. When claim rates are higher than they planned for, they end up with not enough money to pay the claims, so they have to request regulatory approval of rate increases across the board in a state.
2) Fluctuating Interest Rates – if interest rates just fluctuated, generally the actuarians have a good plan for that. After all, we have investment date for nearly 200 years at this point – fluctuations are to be expected and can be compensated for. The problem was the extended down turn (recession, if you will) that happened circa 2008 to 2013. People date it variously, so we won’t quibble over dates. Suffice it to say the economy took a hit and stayed that way for several years. This is not a fluctuation – this is an unplanned for window of time where they were not earning as they anticipated from invested premiums. This means they did not have enough money to pay claims. The result – rate increase approvals thru insurance commissioners.
These days, any sales agent worth their chops should tell you to expect a rate increase on a traditional policy if your horizon of ownership is more than 15 years. Medical science continues to advance, lifespan continues to be much longer than ever in history, and the economy is an ever unpredictable beast. These will continue to plague insurance companies’ ability to price effectively.
Well, what do you do about it? If you already own a company (a few of the larger companies are: Brighthouse, CNA, Genworth, John Hancock, Mutual of Omaha, Metlife, Prudential, SHIP, TransAmerica, and UNUM,– and those are just a few…there are many smaller companies) and are facing a rate increase, there are a few things you can do…
1) Be grateful you bought when you did – even with a rate increase, chances are your cost per unit is still substantially less than if you were to try to replace the policy today. I spoke this past week with a lady who was quit angry because her premiums were going from $140/month to $225/month. When I priced her same benefits at her current age, she would be paying over $400/month! She is still not happy about the rate increase, but at least she has perspective that she did good to buy younger and healthier. The general rule is if you have owned a policy more than 2 years, it is difficult-to-impossible to replace it for a lesser amount. The longer you have owned the policy, the more this is true (even with rate increases!).
2) Look to see if you can reduce your benefits to keep the cost down. Many people don’t realize that they can drop their benefits back at any time. Even if you have an offer in writing for reductions, you are not stuck with ONLY those options. You can call the insurance company and get pricing on lower benefits. For most people, their financial situation today is different than it was when they bought the coverage. So it is helpful to relook your coverage and do some math. Look at the expected cost of care when you are likely to need this insurance. There are several publicly available, interactive data bases that give you current and future cost of care. Do a search on the internet and you should be able to find one or more. Subtract out what you can comfortably pay out of pocket. The difference is the bare minimum amount of insurance you need to keep.
You can, of course, keep a policy in force that is larger than the bare minimum. But you need to know the floor so you can stay out of financial trouble when care arises. Again, the formula is this: future cost of care – what you can pay = amount of insurance.
These are the types of conversations we have here with folks all the time. We don’t charge a fee for our first half hour conversation with you – most people can get their questions answered in that time window.
These guidelines apply whether you bought the Federal long term care policy, some other “big” names in the industry ( again: Genworth, John Hancock, Metlife, Prudential, Mutual of Omaha, Banker’s Life, UNUM, CNA, SHIP) or any of the smaller companies (Equitable, United Teachers – heck JC Penny even had a policy back in the day!). If you bought a policy when you were younger and healthier, good for you! Now you just have to decide if it still fits your current need…or if you can reduce it and keep it cost effective in your budget. Remember, the alternative to rate increases is that your insurance company would go under paying claims they can’t afford. No one wants the insurance company to file bankruptcy! There are safe guards in place for you with your state’s Guarantee Association in the event of insolvency, but those are never as robust as your original policy. So rate increases – as annoying and frustrating as they are – keep the insurance company alive and viable to pay your claim when you need it.
Stana Martin, PhD, founded Mrs LTC to provide a top-quality resource for clients and customers who need help with long term care claims or insurance comparisons.
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Long Term Care Claims & Insurance