If you’ve ever had a personal experience with a long term care event, you know how valuable a long term care insurance (LTCI) policy can be. According to the US Department of Health and Human Services, 70% of people who reach age 65 will need some form of long term care in their lifetime, it is no wonder talk about LTCI is increasing. Whether or not to buy long term care insurance is still a hard decision for some people, in part because of the price tag, but also because of news about the rate increases on those who already bought a policy.
When an insurance company prices any kind of insurance policy the cost is driven by 3 primary assumptions.
– Investment Returns. How much money can they make on the money you give them?
– Claims. How much money do they think they will pay out?
– Lapse Rates. What percentage of people will cancel their policy in a given year?
Contrary to what some may think, an inforce rate increase for long term care is the last choice for an insurance carrier. They must first file and prove the rate increase is justified for each state, which is time consuming and expensive and there is no guarantee the state will approve it. If a rate increase is approved, it creates a public relations issue as no one likes getting a letter in the mail that an insurance premium is suddenly going up.
So what are the chances if you buy a policy today that the rates will increase in the future?
At a recent national long term care insurance conference that we attended, there was a presentation by Roger Loomis, Consulting Actuary at Actuarial Resources Corp., on the Views from Inside and Outside the Industry that shed light on the idea that current long term care insurance products are far more accurately priced than older products, therefore reducing their risk of a rate increase in the future. Loomis, with help from the ILTCI Conference Association, put together an independent study to understand how pricing assumptions on LTCI have changed over time.
The study had participation from 7 large insurance carriers that have been selling LTCI for at least 15 consecutive years. They looked at these carriers pricing assumptions and the data they were working with when they priced products in 2000, 2007 and 2014. Loomis and his team were then able to create a tool to show the likelihood of rate increases for each product series.
The findings are encouraging and showed that long term care insurance sold today is priced far more accurately than what was sold 8 and 15 years ago. For example, in 2000, they estimated that the likelihood of a rate increase should have been listed at about 40%, while 2007 wasn’t much better and finds those policies have about a 30% chance of a rate increase. By 2014 the carriers changed many of the pricing assumptions and they see the current products with just a 12% chance of a rate increase.
So what does this mean for you if you buy a policy today? A small chance of future rate increases and if an increase is needed, it will be much smaller than policies sold before 2015.
While these are still preliminary numbers, this is promising data for the future stability of long term care insurance. One thing we know for sure is that long term care insurance carriers are taking steps to make sure that products are priced more accurately, therefore decreasing the odds of needing a rate increase and increasing their ability to pay claims in the future. Generally speaking, all assumptions on long term care insurance products have gotten more conservative: lower interest rate assumptions, lower lapse rate assumptions, and higher claim cost assumptions.