Next to a notice from the IRS, one of the more unsettling letters a person could receive is a notification from their insurance company informing them that their Long-Term Care (LTC) insurance premium will be increasing. It’s unnerving on several levels because not only will the coverage become more expensive, but far-to-often no reasons are given for the increase. Plus, you must make the critical decision to either adjust your policy or accept the increase. Feels like one of those unfair moments in life, but what can you do?
Before jumping to conclusions or making a costly mistake (such as dropping your coverage), it’s essential to know that this premium increase is not about you. Many of the biggest LTC insurance carriers, such as John Hancock, Genworth, and Prudential, are sending out the same notice to their millions of policyholders.
As you consider your options going forward, it may help to understand why these premium increases are happening and why they may indicate there is less chance of future increases.
Why LTC Insurance Carriers are Increasing Premiums
With the first policies being issued just 50 years ago, LTC insurance is a relatively new type of coverage, so the carriers’ underwriting experience has been evolving for much of this time. New insurers could only make educated guesses about underwriting and the pricing of their product. Essentially, they had to make assumptions about factors such as persistency, claims, and interest rates without any real experience to draw from. It is only within the last ten years that these companies realized their assumptions were not as accurate as they would have hoped.
As a result, carriers were issuing policies destined to lose money. In other words, the policies’ benefits were so good that when a policyholder went on claim, the benefits paid out by the carriers were much more than they projected. They also didn’t account for a lower lapse rate (insurers make more money when the lapse rate is high) and a higher claims rate because people were holding on to their policies.
But that’s not all. Carriers also assumed that the higher interest rates of the 1970s would persist, giving them a financial cushion to increase their surpluses. Instead, they have struggled through the low-interest rate environment of the last couple of decades.
The combination of higher-than-expected persistency, poor claims experience, and flawed interest rate assumptions have forced LTC insurance carriers to increase premiums on policyholders.
The good news is that there is less chance you will receive future premium increase notices. That’s because the LTC carriers have learned from their mistakes and are now working with experienced-based assumptions. That’s not to say it can’t happen again—just that it is less likely.
What to Consider if You Receive a Premium Increase Notice
If you receive a premium increase notice from your LTC insurance carrier, you will be offered two options: To make some adjustments to your coverage which can decrease your premium, or keep your policy as is and accept the increase.
Policy Adjustment Options
Options for policy adjustments may vary among the different carriers but may include some of the following:
Change the COLA option from compound to simple, or remove it altogether
Reduce the benefit period
Decrease the daily benefit amount
Stop paying premiums and convert to a paid-up policy
Or a combination of some or all of the above
These letters tend to strongly encourage you to make one or more of the proposed changes, even though it may not be in your best interest. That’s why it is highly advisable to consult with your financial advisor before making any decisions about your policy.
Critical Factors to Consider Before Making Any Decisions
The key to making an informed and unemotional decision about your LTC policy is to reassess your current financial circumstances and need for the LTC coverage. If it has been a while since you purchased your policy, your circumstances have likely changed, which could impact your need for coverage.
Here are five things to consider:
Assets and Net Worth—how they compare now versus when you bought the policy. Specifically, are your current assets sufficient to fund all or a portion of your LTC needs?
Cash flow—Can you afford higher premiums?
Age—If you’re in your 50s or 60s, you should consider keeping the COLA. If you’re in your late 70s or 80s, you could consider reducing or removing it.
Health—If you have a chronic medical condition, maintain as much coverage as possible.
Family dynamics—Has an alternative care option emerged that would allow you to avoid professional nursing care?
Again, it is strongly recommended that you work with your financial advisor, who can help you objectively assess your current needs.
For most policyholders, their reasons for purchasing a LTC policy still exist today—protecting assets, reducing the burden on family members, and providing peace of mind. While receiving a premium increase notice can be scary, your best course of action is to consult with your financial advisor before making a hasty decision about this critical coverage.