Not long ago, Lewis Walker of Walker Capital Management in Norcross, Ga., had a particularly irate client. The woman’s long-term-care insurance carrier was about to raise her annual premium a whopping 76%! What could she do?
There was no obvious reason for the price hike. She hadn’t made any claims or contracted any new infirmities. It was, in fact, the third increase in a decade, but the others—at 8% and 5%—had been manageable. This one seemed outrageous. Perhaps it was a mistake.
But it wasn’t. “The pricing has gone through the roof,” says Walker, author of the book Planning for the Challenges of Aging, Healthcare, and Special Needs. “They’re trying to intimidate people into reducing or dropping their coverage.”
Unfortunately, this has become an all-too-familiar scenario. Not only do rates keep rising, but now they’re soaring more for women than men. With a diminishing number of insurance companies offering LTC policies, and the federal government’s recent abandonment of a proposed LTC entitlement, what choices do clients have left?
To be sure, LTC insurance has been troubled for years. MetLife and Allianz are among several companies that quit the business in the past five years. One oft-quoted difficulty is that people are living longer and actually using their benefits, so carriers have to pay out more money for longer periods of time than they had originally factored. “Insurers miscalculated the true costs of providing the coverage,” says Jeremy Kisner, president of SureVest Capital Management in Phoenix. “They overestimated how many policyholders would let their policies lapse [and] underestimated the cost of care and policyholder claims frequency.”
Another drag on profitability has been low bond yields. “The key component in the calculation of LTC insurance premiums is, how much can the insurance company expect to earn on the premiums it invests—and most invest in bonds,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, an independent industry organization based in Westlake Village, Calif. “When interest rates produce very little return, premiums have to make up the difference.”
Old And New Business
Slome insists there’s a marked difference between new policies and renewals of old ones. Most people buy a new policy in their mid-50s; it’s important to apply while you are still healthy enough to qualify, especially since underwriters are growing increasingly stringent. On these new policies, says Slome, “rates are not growing any faster than they have for the past two years or so.”
That’s the good news. The older policies, on the other hand, are imposing heavy rate increases that catch clients by surprise. “It’s on the older blocks of business, where carriers are re-evaluating and playing catch-up, that people are subject to the kind of increases that make the headlines,” Slome says.
Last year, he says, the industry paid out $6.6 billion in aggregate benefits to 264,000 recipients. If carriers are playing catch-up, and underwriters are simultaneously becoming tougher, it’s largely because of past mistakes. “LTC insurance is still a relatively new product, [and] insurance companies are still trying to figure out how to properly write these policies to make financial sense over a long period of time,” says Derek Gabrielsen, an advisor with Strategic Wealth Partners in Seven Hills, Ohio. “Insurance companies need to figure out not only how long someone will live—i.e., mortality—but how well people will live—i.e., morbidity.”
To figure such unknowables, he explains, insurance companies rely on actuarial data. That data didn’t exist when LTC policies began, but now it is more plentiful, hence the re-evaluation. “Add in the fact that the cost of long-term care is increasing at an average of 4.7% to 6.6% a year,” says Gabrielsen, “and you can see why the insurance companies are increasing rates and [why] some have been dropping out of the LTC insurance business altogether.”