LTC Bullet: LTCi's Toughest Questions Answered
August 16, 2006
Comment: Is long-term care
insurance affordable? Will
premiums remain level? Will
benefits be paid? Claude
Thau answers LTCi's toughest questions after the ***news.***
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PHYSICIANS MUTUAL INSURANCE COMPANY.
A rumor having circulated that Physicians Mutual--a corporate
member of the Center--was leaving the LTCi business, we inquired and
received the following clarification:
"Physicians Mutual recently announced its decision to
transition out of the brokerage distribution channel, effective December
31, 2006. This strategic decision will allow the company to focus on and
build upon the success of its other distribution channels including the
agency sales force, direct marketing and telesales.
Physicians Mutual will continue to offer long-term care insurance
through its agency distribution channel."
BULLET: LTCI'S TOUGHEST
Comment: Private long-term
care insurance has not been the smashing success most people expected
when it launched some thirty years ago.
Part of the reason is that easy availability of publicly financed
long-term care crowds out the market for private insurance.
But problems inherent in the product itself have also contributed
to its disappointing results.
Claude Thau tackles three of the tough questions confronting long-term
care insurance. Mr. Thau
is a Master General Agent who helps LTCi producers nationwide. Reach him by calling 800-999-3026, x2241 or email to:
LTCI FULFILL ITS PURPOSE?
question posed in the title of this article is appropriate.
Three issues are involved:
Is LTCi affordable currently?
discuss the issues in the following segments:
have LTCi premiums increased significantly?
Have LTCi Premiums Increased Significantly?
primary forces have caused the increase in LTCi premiums:
Interest rates: As with any insurance policy that is priced with
a premium that is intended to stay level, the premium is much greater
than the cost of LTC for the policyholders in the first year, but
insufficient to pay the cost as they age. Therefore insurers [are required to] set aside reserves that
should be sufficient, in combination with future premiums, to pay future
claims. These reserve
levels are established and reviewed by state insurance departments.
Insurers recognize, of course, that they will earn interest on
these reserves. The
anticipated investment income allows them to charge lower premiums.
(If they ignored such investment income in their pricing,
premiums would be much larger and profits, if any LTCi policies were
sold, would be huge.) In the past, insurers priced policies with expectations of
investment income that have not been realized, hence they have been
forced to increase premiums. The
low interest rate environment we have been experiencing is unprecedented
and was not foreseeable. If
any insurer had assumed in their pricing that interest rates would be so
low, they would have sold no business (due to the high premiums that
would have resulted) and people would have scoffed at any expectations
of such low interest rates.
an insurer had expected interest rates to be lower and had priced the
product with a 1% lower interest assumption, the original price might
have increased 12.5% or more. If
the actuary had assumed a 2% lower interest rate, the price might be
increased more than 26%. This
would vary based on the client's age and the product design as younger
people and products with automatic benefit increases rely more heavily
on investment income than policies sold to older people or without
automatic benefit increases. However,
if the insurance company did NOT realize that interest rates would be so
low and then obtained state insurance department approval to increase
premium starting in the 11th policy year, the percentage increase in
premium might be 2-3 times as high because there would be fewer years to
collect the additional premium and because there would be fewer insured
people to pay those increased premiums (some would have died in the
first 10 years).
Lapse rates: As with any insurance policy, some people drop their
policies as time goes on. When people drop LTCi policies, the large reserves mentioned
in the previous paragraph are released.
For good reasons, there are no cash surrender values in LTCi
policies so the entire released reserve can be used to pay claims for
other policyholders (or can drop through as earnings).
Insurers anticipated that released reserves due to lapses would
help them pay claims. Based
on that theory, they lowered premiums to make the policies more
affordable. Of course, to
the degree that people lapsed their policies, the ultimate claims
experience would be significantly lower because LTCi claims increase
dramatically with age. Although insurers predicted the claims incidence by age well,
they did not anticipate that so many people would still have their
policies at those higher ages. It
turns out that people cherish their LTCi policies and rarely drop them. The lapse rates have been perhaps unimaginably low.
A 3.5% (arithmetic, e.g. 1.5% instead of 5%) reduction in annual
lapse rates might result in approximately twice as many people still
having their policies 20 years later, producing a doubling of claims and
fewer reserves released to help cover those claims.
Because companies have experienced many fewer lapses than they
had anticipated, they have felt pressure to increase premiums for people
who bought those policies.
an industry perspective, the two factors mentioned above (interest rates
and lapse rates) are most responsible for rate increases for new sales
and existing policies. In
addition, some of the older policies were priced before assisted living
facilities were developed. Some
companies decided to pay assisted living facility claims even though
they had not been contemplated at the time the product was priced.
Expanding coverage in such fashion is good for consumers, even if
it were to contribute to a price increase.
Some companies have had higher or longer claims incidence than
they expected and many have had higher expenses than they anticipated.
But, on an industry-wide basis, claims rates and expense levels
have had a minor impact on premium increases.
LTCi Premiums Stable?
the investment market, people often buy a stock when its price is
inflated, then sell when its price falls to a more logical level. We are not very good about understanding and exercising the
discipline to buy when stocks are low and sell when they are high.
By the same token, when LTCi was under-priced in the past, people
blithely assumed that the premiums would stay level.
Now, when prices have been increased on older in force policies,
people fear that policies bought today will experience similar price
increases. However, because
today's policies have been priced more conservatively; because insurers
know more about LTCi now; and because of regulatory actions, the risks
of price increases on a policy bought today, while possible, are much
pricing is more stable because:
Can We Reduce The Risk of Rate Increases?
Develop expertise, or work with professionals who have expertise,
regarding LTCi products, the insurers and how they price their products.
Use an insurer that gets good health information, such as medical
records for all of their applicants.
Buy from a multi-line company.
If a company is focused primarily on LTCi and the whole industry
suffers, that insurer is likely to go into receivership.
A multi-line company is NOT likely to go into receivership.
Therefore the multi-line company has more reason and more ability
to avoid or minimize rate increases.
(They fear the reaction of their life insurance, annuity and
disability policyholders if they have a LTCi price increase.)
Recommend products which have reasonable benefits and clear
wording. If the benefits
are written in ways that people can take advantage of them
inappropriately, people will do so, thereby possibly exposing other
policyholders to a rate increase. If
the deal is too good to be true,...
Recommend policies that are guaranteed not to have a premium
after  years. The only
good premium guarantee is a guarantee that lasts forever once it becomes
is also possible to offset some of the impact of premium increases.
If a purchaser has enough cash flow to pay an increased premium
but is concerned about the net cost, a return of premium rider can be
very attractive. If there
is a future premium increase for the policy but the client never goes on
claim, the full premium increase will end up coming back to the family
as a death benefit. In such
a case, the policyholder is simply losing interest that might have been
earned had the increase in premium not occurred.
We Make LTCi More Affordable In General?
best thing we can do is to sell LTCi when our clients are young, healthy
and married! Obviously,
premiums are lower for people who are younger.
Even more importantly, however, if people don't buy while they
are young, they are likely to develop diabetes, osteoporosis, arthritis,
and other maladies which will make their LTCi more expensive.
Lastly, we frequently find divorced women and widows buying LTCi.
If they had purchased while they were still married, they would
have qualified for a significant premium discount.
can also tailor the LTCi to the client's needs.
If they need LTC, they may be able to pay some of the cost.
LTCi can be used to tame the cost of the care rather than to pay
the entire cost of care. A lower daily benefit costs proportionately less.
They may also be able to purchase a lower daily benefit if they
are prepared to accept a semi-private room or to get care away from more
expensive [metropolitan] areas.
can reduce their LTCi premium by buying a policy with a longer waiting
period. For example, they
can save 10% to 20% by buying a 90 day waiting period instead of 30
days. However a long waiting period can be more risky for young
people because forgoing benefits for 90 days can add up to a lot of
money. If they buy a
$120/day benefit and go on claim in 15 years, their benefit will have
increased to $240/day (due to the 5% compound benefit increases), so the
90 day waiting period will cause them to forgo up to $21,600 in benefits
($43,200 if both spouses go on claim).
For many people, the impact would be even larger than this
insurers offer a calendar day waiting period which counts days of
informal family care-giving toward the waiting period.
It is less risky to buy a longer waiting period when you may be
able to satisfy the waiting period without purchasing commercial care.
states and Federal government are also taking steps to make LTCi more
affordable. For example,
there are some attractive tax breaks for the purchase of LTCi.
course, whether something is affordable depends upon a person's
resources, what else they want to do with their resources and how much
they want the item.
to Maximize the Chances that Claims will be Paid
is the toughest question. Our
job is to provide insurance which will accomplish its intended goal when
the client needs care. Some
of the things we can do include:
Recommend financially-strong companies that should be around to
pay claims in the future.
brokers and prospects prefer a "cash benefit" policy, because
there are fewer requirements that could cause a claim to be denied.
Unfortunately, "cash benefit" policies are much more
expensive, hence may not be a desirable strategy.
if an Insurer Has a Problem Nonetheless?
noted above, the insurance industry has learned a lot, as have insurance
brokers. Although the risk
of price increases has reduced substantially, you might wonder what
would happen if your client has LTCi with a company that eventually
experiences a problem?
prior section explained that a multi-line insurer may be able to absorb
poor LTCi experience because of the revenues being brought in by the
other lines of business. Furthermore,
to protect their marketing success in those other lines of business,
they may be reluctant to raise premiums or may temper any such increase. The potential regulatory disadvantages of raising premiums
might also dissuade them. Thus,
they may choose to absorb [some of] the loss.
a mono-line company would have some recourse available.
For example, it would have its reserves. It would have its risk-based capital. It might have higher-than-expected investment income.
It might have reinsurance agreements with other insurers.
It could raise premiums if necessary.
It could cease writing new business to re-direct the financial
strain of new sales toward the existing policies' claims.
(Regulators might require that it stop writing new business for
LTCi market is very different from the LTCi market of the
turn-of-the-century or earlier. While
uncertainty remains, the stability of the industry and of its premiums
is tremendously improved.
Thau is a Fellow of the Society of Actuaries and member of the American
Academy of Actuaries. He
has focused entirely on LTCi since 1994.
Among other roles, he has headed a major insurer's LTCi line of
business, has been a consultant to the Federal government and chaired
the Center for LTC Financing.