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By Christine Benz | 12-16-2010 01:51 PM

Defense Tactics for Rising Long-Term Care Insurance Rates

Retirement specialist Mark Miller on why LTCI rates have jumped up in 2010 and what policyholders should do about it.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Premiums on long-term care insurance policies have been skyrocketing, and one major insurer has stopped issuing the policies altogether.

Here to discuss how consumers should respond to these changes in the long-term care insurance market is Mark Miller. Mark is the author of The Hard Times Guide to Retirement Security.

Mark, thanks so much for being here.

Mark Miller: Thanks, Christine.

Benz: So, you've recently written an interesting piece about this space, Mark, and first let's talk about why these premiums on long-term care insurance policies are going up so much?

Miller: Well, it has to do with the way that the insurance carriers initially price the products, and they're finding that they're coming up short, if you will, because of the low interest rate environment, which they rely on to maintain and fund the portfolios of policies. And then something called the lapse rate, and that's just the percentage of policy holders who let their policies lapse. Now this is an interesting convoluted issue. So, bear with me for second.

It's a bad thing for consumers to let their policies lapse. Once you buy them, you want to hang on to them; the more years go on, you have got more invested in it, if you will. But from the insurance company's standpoint, and not that they want you to lapse, but actuarially when they project the prices on these policies, what they're doing is saying, well we expect a certain number of people to fall off at a certain point. Of course, when you do fall off and let the policy lapse that's pure profit to the insurance company.

Benz: So, that's more money that's in the kitty to pay for everybody's benefits who stays in.

Miller: So, what's happened is lapse rates have been real low; 1% to 2%. Good news from a consumer standpoint--that means people who are buying them are doing the right thing, sticking with them.

The insurance companies just thought that this would behave more or like other types of insurance where lapse rates are higher. So, that's costing the companies, too.

So, as a result some of the big carriers have been going into the state regulators around the country asking for really big rate increases, sometimes as high as 40% this year, some of them are quite large.

Benz: Okay. So, are any of the state regulators pushing back and saying, no you can't have this?

Miller: They're getting granted it in many cases. So, it's a big rate shock. Then the other thing that's happened that was significant and caught my eye was when MetLife decided to stop writing new policies, and that caught my eye because I think when a major respected carrier says they're washing their hands in the market, that suggests to me that the industry really is going through some re-evaluation.

The other thing about long-term care insurance is, no matter how much people like us nag people and say this is good stuff to have, overall, the market penetration for LTCI is still only about 5%.

Benz: Okay. So, Mark say someone has a policy, and they've seen one of these really high jumps-up in terms of their premiums. What you do? What are your defense tactics?

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