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 may include:

Why do LTCI rates increase?
How do you evaluate the value of an LTCI policy after a rate increase?
Are there 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 include:

Persistency, or how many people drop their coverage before collecting benefits
Return on investments, or how much money the insurance company earns by investing the premiums
Expenses of 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:

the original premium cost
the original plan design
the age of the insured at issue
the objectives 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 increases.

For more information on the insurance benefits available to MSBA members, visit our website at www.msba.org/departments/membership/baia/franklinmorris.pdf.