Rate Increases on Long-Term Care Contracts - Why Did That Happen?
Long-Term Care Insurance is a relatively new product. It does not have the century old+ history that life insurance has, or even the half-century+ history of disability insurance. In 1987, the Robert Wood Johnson Foundation sponsored program development projects in four states, thus beginning the concept of “Partnership” programs that would soon become readily available in most states. In 2005, the Deficit Reduction Act of 2005 (DRA) expanded the availability of like programs to other states, established official guidelines for the sale of long-term care contracts, and developed the tax-qualified plans that are so popular today.
When companies began to create the benefit and payment structure for these products using newly designed “morbidity” tables that had no solid foundation for claims history to work from, carriers practically gave these newly issued contracts away for almost nothing! They “under-cut” the pricing making them attractive and very affordable for the war boomer generation that had begun to face the ever changing society and geographical structure of family members who often no longer lived in close proximity to assist them if needed.
Carriers had no idea about how popular this product would become for the enormous baby-boomer generation on the horizon, who were “sandwiched” between raising their own families, sending children to college, and then taking time off from work to take care of aging parents. Most of the newly issued policies had lavish benefits: unlimited benefit pools, inexpensive 5% compound inflation, limited-pay provisions, and numerous other riders all at a super low cost.
Here comes 2008! Insurers get a nice little “wake-up” call. Bombarded with reduced returns and damage to their own reserves, carriers struggled to continue offering these unlimited benefits with 5% compound when their own returns could not keep up with all the claims they were faced with. Many carriers decided to either get out of the business entirely and raise rates on in-force contacts to such an extent that they were hoping the policy holders would lapse them, or many simply raised rates on the older contracts and created a brand new series of products that took into account all the factors that led to the forced increases of older contracts.
So the good news from all of this is that newer contracts are now more expensive to begin with for the protection of the insured in the future. Most carriers have switched from “Unisex” to “Gender Distinct” rates making women pay more for the same product because they stay on claims longer and are a higher risk for the insurer (good news for men I guess?). Now that carriers have at least 20-25 years of claims history to analyze, it is clear that they no longer need to offer “unlimited” benefits.
The most common contract duration now sold is 3 years. 5% compound is still available, but carriers charge through the roof for it, so 3% has become the new norm. Most carriers have dropped limited-pay policies, opting for lifetime required payments from the client. So the worry that people have for rate increases on newly purchased contacts should be minimal. Carriers have made many necessary adjustments to these contracts in the hopes of never having to raise premiums on in-force policies again. There is still no guarantee that they never will, but the chances are slim at best.
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.