Last December, I wrote a blog about hedging against inflation by using the 10-pay option on long-term care insurance contracts. Long-term care insurance is a hedge in that you use current dollars (premiums) to pay for future costs (benefits paid). If you can front-load the premiums by paying the policy up in 10 years, your contact with longer-term inflation fears can be mitigated. After all, the insurance company could not raise rates after the 10-year period since you would be done paying premiums. It is a great idea, but the times they are a-changin’ and that 10-year option is going away.
The inspiration for today’s blog comes from a seminar I’m giving this week on the changing landscape of long-term care insurance. To understand the changes, and how my opinion is shifting, you first need to understand the problem-well really, two problems.
Low interest rates. Interest rates are at all-time lows, so insurance companies, just like the rest of us, cannot make as much on their portfolios. This hampers their pricing models since they assumed a higher rate of interest on the premiums they consume and invest until benefits have to be paid.
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Insurance companies assume a certain number of policies will be dropped each year. The problem is they guessed high. Long-term care insurance is an emotional product because we are talking about people’s health. People just do not drop this type of insurance very often. Thus, insurance providers are finding that their claims experience is a lot higher than expected and they have not taken in enough premiums to cover what they must pay out.
Because of these problems, there are several large insurance companies that have gotten out of the long-term care business altogether in the last couple years. For the ones that have stayed in, premiums are going up and benefits are now being cut. The 10-pay option I mentioned above is one benefit many companies are cutting because they found that were there too much risk in not being able to boost premiums in the future. Another benefit that is getting “tweaked” a lot is the inflation rider, since insurance companies have found that wanting to keep up with healthcare costs when they are not able to earn that much on their bond casinos is just too tough. This is a loss regarding consumers.
In my mind, the bottom line is that most individuals should consider buying long-term care insurance plan earlier than I might have originally thought, maybe in their early 50s. Acquiring LTC insurance earlier helps because one way insurance companies can limit their very own exposure is to tighten underwriting requirements. Buying long-term care insurance early in life, when you are still healthy, can difference. Second, buying insurance early can give you more options in how you design the benefits to keep the premium affordable.
The positive in all of this is that rates have gone up a lot over the last several years, especially in the last two years. This is a good thing given it might just mean that insurance companies finally understand how to price this type of insurance, which will make foreseeable future premiums steadier. Consumers should want that since we all want the insurance companies to be strong enough to pay statements. I don’t think insurance companies are going to cease offering long-term care insurance. Nevertheless every time they do a little nip in addition to tuck with policy benefits to help with making this type of insurance profitable, they make this policies a little less generous than the types that came before. In my estimation, these kinds of developments probably change the playing industry enough that we should all look at extensive care insurance a decade ahead of when most people currently do.