Almost every LTC Insurance productthat has been around has been subject to in-force premium increases due to well documented factors including an extended low interest rate environment. Despite the increases, however, very few policyholders lapse coverage. This doesn't mean they are happy about the change, however! This article in the November Broker World by Tom Riekse of LTCI Partners discusses how to have the in-force premium increase discussion.
For the last several years, advisors and their clients have had to deal with large premium increases on their long term care insurance (LTCI) policies. Some carriers have announced increases up to 90 percent on older blocks of business.
The issue of premium increases is not just affecting private LTCI carriers. The California Public Employees Retirement System (CalPERS), which self-insures its own LTCI program, had to implement an 85 percent premium adjustment on in-force policyholders. Advisors working with clients who have received premium increases play an important role in educating policyholders about their options.
There are typically four reasons that lead carriers to ask for a premium increase.
1. Mortality Assumptions. In some cases with older blocks of LTCI business, carriers underestimated the lifespan of applicants. LTCI buyers tend to be female, well-educated and engaged in financial planning—characteristics also found in people who live a long life. People who live to an old age often need care at some point, while those who die younger may not incur claims.
2. Lapse Rate Assumptions. Early LTCI policies were priced assuming that a greater percentage of applicants would drop coverage at some point. However, experience has shown that very few clients actually drop coverage.
3. Morbidity (incidence of claims). Carriers underestimated how many applicants would ultimately make a claim. Some of the error was related to substandard medical underwriting, but most was related to incorrect lapse and mortality assumptions. As a result of these incorrect assumptions, more policyholders than expected ended up on claim.
4. Interest Rate Fluctuations. Long term Treasury rates are currently at historical lows, much lower than the interest rates anticipated before the 2008 financial crash. Carriers count on conservative investments to pay future benefits, similar to pension plans.
How can advisors have a conversation with clients about the rate increases? Here are some strategies to consider:
Empathize with clients and explain the reasons behind the increase. Let them know that insurance carriers are required to apply to each state for premium increases, based on experience versus actuarial assumptions. Thus, carriers cannot arbitrarily raise premium rates.
Analyze the existing policy and currently available coverage. Get the premium increase options that the carrier has provided. Additionally, get the premium rates for the policyholders using both current and original issue age.
Then implement a strategy. Most policyholders have three options:
1. They can absorb the premium increase. This happens frequently, especially after seeing that the price for current coverage is higher than the original issue age cost.
2. They can modify existing coverage. The top carriers have developed several options that allow consumers to reduce certain benefits and avoid premium increases altogether. Clients who originally purchased 5 percent compound coverage often find their benefit amount has increased beyond the actual cost of home or assisted living care and can adjust benefits down.
3. On rare occasions, clients may consider replacing their coverage with newer policies or dropping coverage altogether. The fact that this is rare is a testament to the wisdom of the original purchase.
What about new policies being sold?
Are they likely to have similar types of premium increases? Experience would indicate no, because the current products have extremely conservative lapse and interest rate assumptions, no longer offer lifetime benefits and have tighter underwriting. The biggest risks for policyholders might be that they won't be able to benefit from a rising interest rate environment. At least one carrier has built a product that allows the policyholder to participate in higher benefits as interest rates increase.
Current Trends in LTCI Plan Design
LTCI continues to be a popular product with the pre-retirement, mass affluent marketplace. You no longer have to explain the need to prospective buyers; they are coming to advisors requesting information. Furthermore, there is a good chance they have researched the product online before a discussion with an advisor. So it's critical to ask about what they know or have learned in their research about LTCI before discussing planning needs. For example, they may have found old information that promotes policies with lifetime benefits, limited pay features or 5 percent compound inflation riders. While those benefits are undoubtedly attractive, they either aren't available in products anymore or result in unrealistic premiums.
There are several important factors to keep in mind when designing LTC plans.
Have a budget in mind. Recent research from Forbes Consulting Group and John Hancock shows that LTCI, even when purchased by those who can easily afford it, is still price sensitive. The survey included key premium thresholds above which consumers will push back on premium costs. They are as follows: ages 45-51: $75 per month; ages 52-58: $100 per month; ages 59-65: $150 per month.
Choose a monthly benefit level based on the price of home and assisted living care. Traditionally, people have designed LTCI plans based on the cost of a private nursing home room. Consumer research shows that buyers of LTCI would prefer to have care provided at home or in an assisted living facility—choose the benefit based on those costs.
Choose a total benefit pool. LTCI is now illustrated by describing the total benefit pool rather than the number of years of care. The pool gives a more accurate description of what is actually being purchased.
Plan for inflation. Five percent compound inflation coverage is required by regulation. Otherwise it's doubtful that carriers would still offer that option (which has become prohibitively expensive). Instead, the trend is to buy additional coverage as the policyholder ages, using either guaranteed purchase options (GPOs) or step-rated options.
Consider underwriting. One major carrier has shifted to life insurance style underwriting, including blood work.
The need for LTCI planning hasn't changed, but the industry is evolving. Building and keeping client confidence in LTCI takes time. Working through in-force premium increases and understanding the evolving nature of long term care plan design is critical for advisors. Since many advisors are not specialists in specific policy details, it often helps to partner with someone who is, such as a brokerage general agent. Ask him to be available through conference calls to help with client questions. Organizations such as the American Association for Long- Term Care Insurance (aaltci.org) or the Life and Health Foundation (lifehappens. org) can also assist with good educational material.
TOM RIEKSE, JR. CEBS, ChFC, is managing principal at LTCI Partners, a brokerage general agency specializing in long term care insurance. He has been working in the LTCI business since 1991, with an emphasis on communicating the value of planning to advisors, employers and consumers. He has primary responsibility for all marketing and technology initiatives at LTCI Partners and has worked closely with carriers and vendors to make LTC insurance easier to sell and enroll.
Riekse received his undergraduate degree from Hope College, Holland, MI. He subsequently achieved his MBA at the University of Illinois, Chicago, IL, with a concentration infinance and marketing.
Riekse serves on the board of directors of the Society of Financial Services Professionals- Chicago and the government affairs committee of The National Association of Independent Life Brokerage Agencies.
Riekse can be reached at LTCI Partners, 100 Field Drive, Suite 140, Lake Forest, IL 60045. Email: firstname.lastname@example.org.