Long-term care insurance (LTCI) has become recognized as a
key option when planning for long-term care to complete financial and estate
planning. It is important for you and your clients to understand and have access
to expertise in this insurance specialty, not only at the time of purchase
but throughout the life of the policy, which could be 10, 20, 30 or more years.
It may be necessary for advisors to be able to answer some
significant questions that their clients have about their long-term care insurance
policies as the answers could affect financial and estate plans that rely on
this insurance to fund any necessary long-term care needs. Some of the questions
do LTCI rates increase?
How do you
evaluate the value of an LTCI policy after a rate increase?
other alternatives if the rate increase diminishes the value of the policy?
Why LTCI Rates Increase
Increasing numbers of people own long-term care insurance.
Also increasing is the number of people who are experiencing rate increases
for in-force policies. Few long-term care insurance policies preclude the possibility
of rate increases. Although the rates cannot be raised for individual policies,
most insurance companies reserve the right to raise the rates by class. This
can happen only after a formal request from an insurance company is submitted
to a particular state insurance administration and the request is approved.
The state insurance administration must agree that the insurance
company indeed needs a rate increase to continue to provide the promised insurance
coverage over the life of the in-force policies. Several factors may affect
the potential benefit pool (the money available to pay claims). These factors
or how many people drop their coverage before collecting benefits
on investments, or how much money the insurance company earns by
investing the premiums
the insurance companies.
The first two reasons for rate increases have been significant
factors in the rationale for rate increases for older, in-force long-term care
insurance policies. So, state insurance administrations have granted rate increases.
The policyholder is notified, and when the next premium notice arrives it costs
more to keep the insurance in force.
Many newer policies are priced higher, recognizing that very
few people lapse their policies for any reason but death. These newer policy
rates also take into account the fact that interest rates on investments have
been substantially lower over the past few years.
Evaluating the Value of an LTCI Policy After a Rate Increase
After experiencing a rate increase, the LTCI policy holder
may be confused as to the relative value of the LTCI policy to the increased
price. It is a multi-step process to evaluate the value of a policy after a
rate increase. The steps include understanding the following:
original premium cost
of the insured at issue
for owning the insurance.
One plan design factor that has a considerable impact on
whether or not an LTCI policy continues to be of significant value after a
rate increase is compound inflation protection. Take for example a couple who
purchased LTCI policies 12 years ago. Four years ago they experienced a rate
increase of 12 percent. One year ago they were presented with another 20 percent
increase, making a total rate increase of 32 percent in less than five years.
However, because they originally purchased a daily benefit coverage amount
of $150 with compound inflation protection, that daily benefit amount has grown
to $270. Their benefits have grown more than 70 percent and continue to grow
at 5 percent compounded each year. Their original premiums were relatively
low because the couple was in good health, and the new increased premiums are
still affordable for them. They are paying more but receiving a larger daily
benefit for their money. The increased-but-still-affordable premium and the
increased daily benefit continue to be valuable in helping them to achieve
their quality of life and financial objectives.
Not All Rate Increases are Acceptable and/or Affordable
A seasoned long-term care insurance specialist can be helpful
in assessing the value of an LTCI policy after a rate increase and can provide
alternatives if the increase results in a policy of diminished value. Such
alternatives can include changing one or more of the seven plan design components
to reduce cost or changing insurance carriers for all or part of the coverage.
It might even be appropriate to drop coverage altogether if objectives and
financial circumstances have substantially changed. Many newer policies actually
have NAIC-suggested, state-legislated protection called contingent non-forfeiture.
It is important to understand this built-in protection in case of future rate
For more information on the insurance benefits available
to MSBA members, visit our website at www.msba.org/departments/membership/baia/.
Sally Leimbach, CLU, CEBS, CLTC, is a long -term care insurance specialist
associated with FranklinMorris, exclusive coordinating broker for the Bar Associations
Insurance Agency, Inc.