Final December, I wrote a blog about hedging against inflation using the 10-pay option on long-term treatment insurance contracts. Long-term care insurance coverage is a hedge in that you use present dollars (premiums) to pay for future costs (benefits paid). If you can front-load the premiums by paying the plan up in 10 years, your contact with longer-term inflation fears can be mitigated. After all, the insurance company could not increase 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 aside.
The inspiration for today’s weblog comes from a seminar I am providing this week on the changing landscape of long-term care insurance. To understand the particular changes, and how my opinion is shifting, you first need to understand the problem-well really, two problems.
Low interest rates. Interest rates are in all-time lows, so insurance companies, just like the rest of us, cannot make just as much on their portfolios. This hampers their own pricing models since they assumed a greater interest rate on the premiums they take within and invest until benefits have to be paid.
Lapse ratios. Insurance companies believe a certain number of policies will be slipped each year. The problem is they guessed high. Long-term care insurance is an emotional product because we are talking about individuals health. People just do not fall this type of insurance very often. Thus, insurance providers are finding that their claims encounter is a lot higher than expected and they have not really taken in enough premiums to cover what they must pay out.
Because of these problems, there are many large insurance companies that have gotten from the long-term care business altogether within the last couple years.
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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 simply because they found they had too much risk within not being able to raise premiums in the future. Another benefit that is getting “tweaked” a lot will be the inflation rider, since insurance companies have discovered that trying to keep up with healthcare costs when they cannot earn that much on the bond portfolios is just too tough. It 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 would have originally thought, maybe within their early 50s. Buying LTC insurance policy earlier helps because one way insurance providers can limit their exposure would be to tighten underwriting requirements. Buying long-term care insurance earlier in life, if you are still healthy, can make a difference. 2nd, buying insurance earlier can give you a lot more options in how you structure the benefits to keep the premium within your budget.
Good in all of this is that premiums have got 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 cost this type of insurance, which will make future rates steadier. Consumers should want that since we all want the insurance businesses to be strong enough to pay claims. I actually don’t think insurance companies are going to stop providing long-term care insurance. But every time they do a little nip and stick with policy benefits to help make this type of insurance profitable, they make the insurance policies a little less generous than the ones that came before. In my estimation, these developments probably change the actively playing field enough that we should all take a look at long-term care insurance a decade ahead of when most people currently do.