11 minute read
Helping Your Client Navigate Long-Term Care Insurance Rate Increases
By Maryglenn Boals
You dread the phone call. You and your client are shocked by the numbers, but rate increases for traditional long-term care insurance premiums are quickly becoming the norm. Some carriers are announcing a one-time increase, but now we are seeing phased amounts over the next few years already projected for the client (should they choose to maintain their original benefits).
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Rate increases are actually an opportunity for you and your client. For too long, LTC policies were placed in the back of someone’s file cabinet once they were purchased. The policy never saw daylight again until perhaps an adult child discovered it when the parent needed care. For many clients, talking about extended care needs is an uncomfortable conversation. They would rather see it as a transaction their financial advisor told them would protect their assets and family. Once it was secured, most don’t want to think about it. They set up auto payments and go back to living life. Transaction completed; uncomfortable thoughts packed away. Until that rate increase letter arrives in the mail ... What they don’t see is that a rate increase notice is a great time to review and rebalance their long-term care plan.
Why Are Rates Going Up?
Long-term care (LTC) insurance has a “long tail” – meaning that utilization of the benefits often lag for 20-30 years after purchase. Carriers base their pricing on predicted market inflation rates, lapse ratios (how many will drop the policy) and benefit utilization. All of these factors did not behave the way many predicted. We have seen a long period of incredibly low interest rates, a recession and a pandemic just within the last 15 years. The low interest rates brought a favorable environment for major purchases, such as cars and houses, but greatly impacted LTC carriers. The recession validated the client’s decision to purchase LTC insurance as their portfolios contracted, but the pandemic made people realize the true value of being able to afford to stay at home if they needed care.
With all these unpredictable variables, why did we expect a carrier to have “fixed” pricing? Because the rate increases of the past were almost non-existent. During the application process, it is disclosed several times that the rates can go up. Historically though, many clients were told “never in the history of the XYZ company has there been a rate increase.”
Remember that “long tail”? No one predicted this extended period of low interest rates. Utilization of those early issued policies started to happen and it was not as predicted. Healthcare costs were climbing higher than expected. People were living longer, and claims were longer and more expensive. It was a perfect storm.
Navigating the Increase Options
The process of a rate increase involves a letter from the carrier to the insured and usually includes a few options to proceed. 1. The client can accept the rate increase (usually this means doing nothing) and pay the new amount on the next renewal date. 2. There may be a predetermined reduced amount that the client can accept that would keep their premium the same as it currently is, but modifies the benefits. This may mean reducing their inflation rate or reducing the benefit amount or duration. The goal is to keep the premium the same, so you adjust some aspect of the policy to make that happen. 3. If the increase is of a certain specified amount, it may trigger the option of
“contingent non-forfeiture.” By contract, this allows the client the ability to stop their payments completely and preserve their benefits equal to the amount they have paid into the carrier. For example, a client pays a $2,000 per year premium for 20 years. They have paid into their account $40,000.
The same rules of their policy apply, but the new pool of benefits is not the insured pool, but an amount equal to the dollars they have paid in.
Essentially, they only have $40,000 in LTC benefits if they do this. It allows them to feel like they didn’t lose their money, but remember, these dollars are only accessible if qualifying for benefits and following the original policy’s outline of benefits. 4. Ask the insurance carrier for different alternatives. This is the option most clients aren’t aware they have. For example, the client has an eight-year benefit period, and they would be willing to now reduce the duration of the benefits to five years. Or another option may be reducing the inflation to only 3% compound from 5% compound. Ask if they can keep the current growth but reduce the inflation moving forward to a lower amount. This is the time where the client is typically in a better position with the carrier to provide those alternatives. The design of the original policy may limit some of the choices, but this is a great opportunity to ask for alternative options. You then need to weigh those adjustments and the risk for future LTC expenses. If the policy has been in place 15 years, are the concerns the same? Savings? Investments? Be cautious in saving a few dollars in premium and losing future coverage unless you really can assess the risk to everyone’s comfort level.
A word of caution: Many clients will be frustrated and react with “I want to go buy something else.” This is usually not the best solution. Typically, many years have passed since the original purchase, and they are now older, and their health status may have changed. Both components greatly impact current pricing. Also, policies sold in the last several years have been significantly repriced. Providing them with a current quote similar to their original benefits helps a client gain some perspective on the bargain that they could be holding. This is why it is so important to reassess their LTC needs at this new point in time. Is it the same as when the policy was purchased?
As Heraclitus famously said, “the only constant in life is change.” The real issue is how you and your clients navigate those changes. l
Maryglenn Boals, CLTC, LACP is an independent insurance agent specializing in LTC products and planning. On a consultant basis, she can assist your client’s facing rate increases. She can be reached at 602-418-5069 or mgboals@ mgboals.com
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