If you ever talk to LTC actuaries who designed long-term care products in the 1990's, they'll admit they miscalculated the expected lapse rate of LTC insurance. They'll mention that they made the calculations based on the best available information at the time and that premiums were low because they were "lapse supported." When those expected lapse rates were lower than planned it was one of the reasons that in-force rate increases became necessary.
In hindsight, however, if the actuarial lapse rates had been as expected it may have been much worse news than in-force premium increases! As this recent study from Boston College shows, "at current lapse rates, men and women age 65 have, respectively, a 32- and 38-percent chance of lapsing prior to death.
Before you know it Time Magazine published an article entitled "Seniors Dump Long-Term Care Insurance Just When They Need it Most". Although some in the industry have argued the study misleads the number of lapses, there is no doubt that many policyholders who end up needing care have let their policy lapse.
One of the key aspects of avoiding lapses is the third party notification - the person who is not the policyholder and is contacted after the premium is late. Every policyholder needs a third party notification.
Here are some things that should be top of mind for carriers, advisors, and adult children of policyholders:
- Carriers: Carriers, please do a better job of helping policyholders avoid lapses. Although lapses may help the performance of the LTC block in the short-term, in the long-term it will hurt the reputation of the industry and lead to the unfortunate myth that carriers will do anything to avoid paying claims. Some ideas? Reach out to policyholders and encourage them to complete the third party notification form. Include the option of email reminders to complement the paper premium statement. When a policyholder is behind on premium and in danger of lapsing, make a determined effort to prevent it by contacting advisors and family members. Allow policyholders to manage and pay premiums online. Finally, improve the annual premium statement so that it provides more policy information. With Performance LTC, John Hancock is making strides towards doing that.
- Advisors: Advisors have several options to ensure that lapses don't occur. For example, they can contact current policyholders and verify a third party notification form is in place. Even without the 3rd party notification form they can ask for someone who should be contacted in case a premium is late. The advisor should also get the premium due date and set reminders on their calendars so that a reminder message will go out - today's calendars allow for reminders to be set for far in the future so someone will never forget. Reminders are a great way to stay in touch with clients.
- Adult Children: As an adult child of 4 parents and in-laws who have LTC policies, I periodically check with the carrier to make sure the third party notification is up-to-date. I also have copies of the policies, which I have scanned and stored on a google cloud drive so that they won't be in danger of disappearing one day. I've set up calendar reminders on premium due dates. Finally, I'll be prepared to get power of attorney in case parents are unable to handle bills by themselves anymore.
Between carriers, advisors and children there should be plenty of people who are around to make sure premiums are not forgetten. Long-term care insurance is too valuable to allow the risk of lapse.