Rate Increases Continue in Challenging LTCi Market

This year, more than 110,000 California Public Employees’ Retirement System long-term care insurance (LTCi) policyholders will endure 85% premium increases.

And while the increase notification in 2013 may have been the most dramatic to receive national attention, virtually all major LTCi carriers, including MetLife, Genworth and John Hancock, have sought similar significant rate increases.

What’s behind the trend? Key factors driving premium rates have enjoyed significant headwinds in the last two decades, including:

• Abnormally low interest rates compared to what actuaries used when developing rates and forecasting profitability
• Hovering 1% “voluntary lapse rate”—much lower than the projected 4–5% assumption
• Higher morbidity rate and improving mortality rate, meaning more policyholders are living longer and require LTC assistance

Policies that have experienced the highest rate increases are those that have a lifetime benefit and include a 5% annual growth compound option. Agents must explain to clients that while insurance companies were touting this valuable coverage, they were counting on more seniors to drop their coverage—a counterintuitive thought process since an increase in age and policy loyalty more than likely means allegiance to the coverage, even in the face of continual rate increases.

It might help to consider LTCi as a way to shelter some assets from Medicaid—the payer of last resort—in the event someone needs LTC assistance. This approach involves using an LTC Partnership Policy, available in nearly 40 states, which allows policyholders to protect a portion of their assets they would otherwise have to “spend down” to qualify for Medicaid when they need LTC benefits.

Most LTC Partnership Policies allow for a dollar-for-dollar trade-off: Every dollar a policyholder taps from the Partnership Policy is protected from Medicaid reimbursement. For example, if a client has a $250,000 Partnership Policy, they could incur up to $250,000 of benefits for care and $250,000 of assets would be exempt from Medicaid’s reach.

But note that Partnership Policies have certain requirements, including required “inflation protection” (compound) for policyholders under age 61 and a level of inflation protection requirement for those ages 61–75.

Demand for LTCi is clear. But affordability is a key factor for many, and history indicates that current premium rates will continue to experience rate hikes. Agents should have a frank conversation with their clients to discuss how they can partially protect themselves and their standard of living should they require LTC assistance for an extended period of time.

Dave Evans is a certified financial planner and an IA contributor.