LTC Cost Increases Pummel Both Insurers and the Insured
By Ric Edelman
Here’s why, and what it means for you
MetLife, which has been selling long-term care insurance for 25 years, recently announced that it would no longer sell LTC policies after 2010. The decision does not affect current policyholders.
Meanwhile, John Hancock has announced price increases of 40% for many of its existing LTC policies. (Affected policyholders will be notified over the next two years when their increases will occur.)
The turmoil is caused by the fact that long-term care is a relatively new aspect of society, and the insurance industry is discovering that selling policies profitably is much more challenging than it expected.
To understand why, first understand that today’s sellers of long-term care insurance began by selling life insurance — and they’ve been doing that for hundreds of years. The industry has literally centuries of data telling it how many people can be expected to die in a given year, what the ages of those people are likely to be, and how likely it is for someone who buys insurance to actually retain that policy until they die (thus requiring insurers to pay the death benefit).
That last statistic, known as the persistency rate, plays a huge role in helping insurers determine what to charge for life insurance policies. Obviously, if you cancel a policy before you die, the insurance company gets to keep all the premiums you paid over the years without ever having to pay out benefits. This helps insurers keep prices lower for the people who keep their policies until death, while helping the insurance companies earn a profit. (And as much as we all love to hate insurance companies, the truth is that we must allow them to earn a profit; otherwise, they won’t offer insurance at all.)
Unfortunately for insurance companies, they don’t have centuries of data about long-term care. Not only have they underestimated how quickly costs would rise, forcing them to pay more than they expected when claims are submitted, they wildly underestimated the persistency rates. While as many as 95% of life insurance buyers cancel their policies before they die, most LTC policy holders never drop their coverage. As a result, insurance companies are paying far more in LTC benefits than they predicted. Combine all that with low interest rates, which make it difficult for insurance companies to profitably invest premiums, and it’s easy to see why many insurers are raising rates while others are simply quitting the business altogether.
So what does all this mean for you?
It means you need long-term care insurance even more than you thought you did. The experience of the insurance companies is clearly demonstrating that far more people are incurring LTC expenses than anyone predicted, and that means you can expect to incur the costs as well. That means your choice is to pay for the cost yourself or buy a policy so the insurer will pay for it. If you already have a long-term care policy, you need to keep it. If the premium rises, you need to pay it.
Do not cancel the policy or select an option that decreases your benefits instead of increasing the cost.
And if you don’t yet own an LTC policy, I urge you to consider buying one before they quit offering them. And don’t fret about price increases: While the premiums may increase, the cost will be a fraction of what you’d pay for care on your own. And buy it sooner than later, because the cost is based on your age at the time you purchase it (the younger you are, the cheaper it is annually). Also, as you get older you’re likely to develop a health condition that will prevent you from qualifying for a policy.
Talk to your advisor about finding the right LTC policy for you and your family’s needs.
For more information about insurance options, or to order a copy of the National Association of Insurance Commissioners’ free booklet “A Shopper’s Guide to Long-Term Care Insurance,” visit insureuonline.org or call (866) 470-NAIC.