Understanding Rate Hikes

As far as I can tell, every reputable long-term care insurance (LTCi) carrier that’s sold LTCi for more than five years  has given its policyholders at least one rate hike. I will attempt to explain what causes LTCi rate hikes and what to do about them.

What causes rate hikes?

1. LTC insurance policies have extraordinarily high persistency, which means that about 95% of all LTCi, industry-wide, remains on the books after it is sold. When LTCi is properly placed, hardly anyone ever drops their policy.  LTCi persistency is higher than actuaries anticipated
2. LTCi policies also have incredibly long “tails”, meaning that an LTCi policy sold to a 55-year old might stay on the books 30 or more years before it is collected from
3. Protracted, low, interest rates
4. Claims that last longer than expected

These characteristics combine to cause a perfect actuarial storm for LTCi carriers and policyholders.

LTCi’s high persistency rate and long tail are unique. Because of both of these traits, when an LTCi policy is issued, the carrier must post very large amounts of reserve funds. The carrier invests the reserves in conservative, long-term assets. The majority of LTCi’s profitability is derived from interest earned on these posted reserve funds. When interest rates plummeted unexpectedly in recent years and stayed down for so long, when policies experienced higher than predicted persistency rates, longer “tails” and claim durations, prior actuarial assumptions became incorrect. Rate hikes are a means to adjust for these inaccurate assumptions and to ensure that all policies are paid in full when clients collect on them.

It’s a good thing LTCi carriers do this. They act in a responsible way. I would rather have LTCi carriers give rate hikes to be able to honor their obligations to policyholders, than behave like the federal government and make financial commitments that it cannot meet in the future.

If clients cannot increase their payments to cover the rate hikes, the majority of LTCi carriers allow policyholders to pare back their LTCi at time to get their premiums back down. Even if an LTCi policy needs to get pared back to keep its premiums affordable,  the policyholder will normally still have a high-performance policy.

What causes public alarm and outcry over LTCi rate hikes?

When I get client calls in response to news of their LTCi rate hike, reactions typically consist of fear, anger or a mixture of both.

I blame the media and the insurance industry for much of  these reactions.

The media is historically under-educated on the subject of LTCi. Today, with fewer journalists  and less freedom than ever to adequately research before tight deadlines, the media often gets the story of LTCi rate hikes all wrong. There are exceptions. Terry Savage is one. She’s one of a dying breed of true journalists with the luxury of being able to meticulously research her stories before they’re published. More often than not, media runs “if it bleeds, it leads” stories about LTCi. Such incorrect stories describing “intolerable” LTCi rate hikes, without providing adequate explanation, are the norm in mainstream media, not the exception.

The insurance industry must also accept some blame because of its high employee turnover. It is highly unusual for the selling agent to be still active, accountable and present when clients receive rate hikes.  And when policy holders inquiring about the increased premiums do not receive the proper explanations and information, their logical reaction is a combination of anger and fear. When this  results, lacking a competent agent’s insight, help and advice, policyholders too often make the wrong decision about their LTCi policies.

The truth is, even with rate hikes factored in, the original LTCi policy is normally still a steal of a deal. It is easy to prove this. All we need to do is take the rate hiked LTCi policy’s current monthly or daily benefit (if it has built-in automatic growth every year, its current values are usually significantly higher than what the policy started at). We then compare rates for a replacement LTCi policy at the policyholder’s current age, not their original buying age. When we compare the prices of equivalent new coverage with the present policy’s benefits, and at the client’s present age, the results are normally quite shocking. Even with the rate hike taken into account, the original LTCi policy is still very inexpensive, compared to what a new, comparable policy would cost.

In my experience, policyholders calm down when they understand the impact of insurers’ claims experience and low interest rates. When the circumstances causing LTCi rates hikes are explained to them in a businesslike, rational, professional manner, the majority of my clients choose to keep their LTCi policies and tolerate the rate hike.

I lament that so many LTCi policyholders have no one they can trust and turn to for advice when their rate hike letter arrives. This can cause unintended, bad headlines and publicity for LTCi. This in turn gives people and families additional excuses to put off having conversations about responsible and reasonable long-term care planning.

I have seen in excess of 300 of my clients’ LTCi policies pay out lavishly and with ease, exactly as planned. This has given my clients increased dignity and options. It has prevented much stress and strife, both emotional and financial, for my clients families. I have never had a single claim denied in the 23 years I’ve been in practice.