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Defense Tactics for Rising Long-Term Care Insurance Rates

Christine Benz

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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Miller: Well, the number one thing I would say is, the first reaction should not be to drop your coverage, because as we were saying, once you have it you want to stick with it.

There are ways you can avoid the rate hikes basically by making adjustments in your benefits, and so you can respond by saying to the company, rather than take the rate hike, I want you to reprice for me along a couple of parameters.

And one point worth making here is that the policies that are seeing the biggest rate hikes are the ones that are what I'll call the "full boat coverage." These are policies that have unlimited lifetime benefits often with built-in inflation riders to the level of daily benefits. So adjustments can be made to these policies. For example, you could say, if you have one of these lifetime benefit policies, say adjust it to a set specific amount of time, say a three-year benefit. And the statistics show that only about 13% of holders of these policies need more than three years of coverage, and only about 8% or 9% need more than four years. So you could adjust to a three-year benefit period.

Benz: So anchor it the data that we have about long-term care usage rather than going with that unlimited coverage.

Miller: Yes. It's a roll of a dice to an extent, but you'd still have that three years of coverage and that can make a huge difference in the premium. I asked someone in the industry to price some estimates for me, and the difference of the lifetime versus this three-year benefit might be the difference in premium of say $1,500 a year as compared to $4,000, so it's a big difference.

Benz: Okay and you say, though, don't forgo that inflation adjustment. That you still want that even if you do pull back on your benefit rider?

Miller: That would be low on my list of things to adjust. If you have an inflation rider, you'd want to keep it.

Benz: So Mark, if someone hasn't purchased a long-term care insurance policy, I guess they might naturally be feeling reticent, given some of these news headlines that we've seen. What should you be looking for? Is there anything you can do to protect yourselves against these big rate increases down the line?

Miller: It is important to, number one, go with one of the major respected carriers. There is about a half a dozen in this market that are real solid players. You can check their ratings with the insurance rating agencies like Best or Moody's, and you can ask the insurance carriers who you're talking to to tell you what their history has been on rate increases to find out if they've done a good or bad job of pricing their policies in the past.

Those would be some steps, and then, again, I think the industry is going to be moving towards more of these affordable defined approaches rather than the open-ended coverage. I think we're going to see more and more of that.

There also are some new products that have come on the market that can be interesting that are kind of hybrids of life insurance with accelerated death benefit riders that then you can draw as an LTC benefit, but those are at the high end of the market in the sense that they are generally attached to universal life insurance policies, which are kind of expensive ways to buy life insurance.

Benz: Right, it seems like the more of flexibility you have as a consumer, the more it's going to cost you.

Miller: Exactly. Exactly right.

Benz: Okay, well, thanks, Mark, for sharing your insights. We appreciate you being here.

Miller: Thank you, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com