Recent premium increases on existing long-term care insurance policies have made a lot of prospects and maybe even a few agents hesitant about buying and selling coverage. Nobody wants to buy a product thinking that the cost could suddenly jump 30% or 40% without warning. And no agent wants to have to explain a premium increase like that to his or her clients. However, when you look at the full story of what caused such dramatic rate increases, you will understand why industry experts like Michael Kitces, director of research for Pinnacle Advisory Group Inc., are optimistic that rates have stabilized. Will we continue to see rates increases in the future? Almost certainly — as the cost of care continues to rise, so too will the price of insurance — but we shouldn’t see increases of that magnitude again.
There were two major factors that played into insurance companies raising rates on old blocks of business.
First, many insurers overestimated the percentage of people who would allow their coverage to lapse every year. Insurers expected about 5% of policies to lapse when actually it has only been 1% to 2%.
Second, interest rates have fallen from 6% in the early 1990s, just when long-term care insurance was gaining momentum, to below 2% today. As with all insurance, long-term care insurance is priced on the ability to collect premiums and invest them until claims are due. Therefore, the reduced ability to turn a profit on investments has driven a significant increase in premiums. The American Association for Long-Term Care Insurance estimates that every 1% decrease in interest rates equates to a 10% to 15% increase in premiums.
Insurance companies now know that with interest rates and lapse rates being as low as they will be, there isn’t much room for adverse surprises since neither can fall below zero. Insurers are charging more for new policies to avoid ever having to raise premiums dramatically in the future. Although there has been an increased fear of buying already pricey long-term care insurance, the reality is that today’s premiums may already be close to peaking and starting to become stable.
If you are having trouble with clients committing to long-term care insurance due to the rising premium cost, use this information to reassure them that this is a trend that can’t continue, but the cost of long-term care will continue to increase rapidly. That is why it is so important for them to have long-term care insurance plan that will cover these rising costs.
For more information call your LTC marketing consultant at 1-888-456-8884.