Executive Summary As the long-term care insurance industry continues to struggle in today’s low interest rate environment, a growing number of clients who bought long-term care insurance in the past are getting notifications of premium increases – and often they’re very significant increases, even from major companies like GenWorth, John Hancock, Prudential, and MetLife. While the LTC rate increase may be a shock, though, the reality is that in many cases the coverage is still cheaper than it would be to buy the policy anew in today’s marketplace – which essentially means that even with the premium increase, continuing the LTC coverage can be a pretty good deal. Nonetheless, in some situations the premium increase makes the insurance unaffordable, which forces them to decide how to modify and reduce the coverage to maintain the original premiums. When such reductions are necessary, most clients should choose to reduce the benefit period, and older clients may reduce the rate on the inflation rider as well; most clients will probably want to avoid reducing the daily benefit amount. The good news, at least, is that given how much more expensive LTC insurance is in the current marketplace, it’s drastically less likely there will be premium increases on today’s new policies. Nonetheless, it’s still necessary to properly deal with and navigate the rate increases that are occurring on coverage purchased years ago.

How Long-Term Care Insurance Rate Increases Work

As a starting point, it’s important to understand how long-term care insurance rate increases really work.

Qualified long-term care insurance (eligible for tax-free benefits under the Internal Revenue Code) must be “guaranteed renewable” – which means as long as premiums continue to be paid, the insurance company must continue the client’s coverage, and they cannot single the client out to either cancel his/her coverage or raise the premiums.

However, rates on insurance that is guaranteed renewable can be increased by going to a state’s Department of Insurance and requesting a premium increase for an entire “class” of policies, such as “all policies issued to people age 55-64 in the year 1998” – and if your client falls into that group of policyowners from that age bracket and that year in that state, the client’s rates can be increased.

Given that state insurance departments have to agree to premium increases – which aren’t exactly popular – why do they ever approve at all? Because in situations where the premiums are too far below anticipated claims, there’s a risk that the insurance company could be rendered insolvent and unable to fully pay all claims to all policyowners. At the end of the day, it’s better to have a rate increase that ensures policyowners get all their benefits, than keep premiums in place at the risk of rendering the policies partially or entirely defunct.

Notably, though, what premium increases do not allow is for companies to make up the prior losses that they’ve had, nor to increase the premiums so far that the insurance company can make a big profit going forward. Premium increases tend to merely be enough to ensure that the company remains solvent and capable of fully paying all claims for all policyowners. Of course, there is some uncertainty to the projections, so it’s conceivable that the insurance department may approve a rate increase large enough that the insurance company will enjoy some extra profits.

However, in practice the opposite seems to be the case; the insurance departments have been so unwilling to push through premium increases unless it’s absolutely necessary that often the increases are huge when they do occur (because it’s been so many years that the insurance company has been undercharging), and some companies have ultimately had to go back later and ask for another premium increase because it ultimately turned out that the first increase was so conservative for existing policyowners that it still wasn’t enough to ensure solvency (much less any profits) for the insurance company.

Decisions To Make When The Premium Increase Occurs

So given all the steps involved for an insurance company to get a premium increase approved, what should clients do when the notification arrives?

The good news and the bad news is that there are usually more choices than just “pay the new premium, or get rid of the policy.” To give policyowners flexibility in how to handle a rate increase, insurance companies usually offer several options, including:

1) Keep the policy as-is and just pay the new premium

2) Keep the current premium and reduce the policy’s daily benefit amount to the extent necessary to bring benefits in line with cost (e.g., from $250/day down to $200/day)

3) Keep the current premium and reduce the policy’s benefit period to the extent necessary to bring benefits in line with cost (e.g., from a 5-year benefit period down to 4 years)

4) Keep the current premium and reduce the policy’s benefits inflation rate (if the policy included an inflation rider) to the extent necessary to bring benefits in line with cost (e.g., from a 5% inflation rider down to a 3.5% inflation rider)

5) Cancel the policy

The bad news, of course, is that more choices make the decision more complex. Although not every insurance company and premium increase situation will include all five options – the requirements for what is made available vary by state and some insurance companies offer more flexibility than others – most companies will offer at least one or two of the options in the middle, in addition to the first and last. Making A Decision To Handle A Premium Increase Given the choices, which are most appealing? There are a number of factors to consider… 1) Keep the policy as-is and just pay the new premium In general, this is the most appealing option, if it’s affordable. For instance, think of the situation in another context, as though the cable company came forward one day and said:

“Our apologies. We just discovered an error in our billing. It turns out that although you currently receive the 187 premium channel cable service, we have actually been billing you for the 114 channel basic service. Having discovered our error, we unfortunately need to raise your rates to charge you for the 187 premium channel service you are actually receiving. Alternatively, if you wish, you can drop your service down to the 114 channel basic service that you have actually been paying for all along, and we’ll continue to charge you the same amount. Either way, though, we will not charge you anything for all the years we accidentally gave you the premium service for the basic cost.”

If you want the 187 premium channel cable service, and can afford it, you should go ahead and pay for it even after the price is “corrected”. While it is frustrating that you can’t get the same features for the original cost, the reality is that the original pricing was wrong, and the new pricing is correct. The new pricing can still be good value for the benefits you receive.

And notably, this is especially true in the long-term care insurance context, because policies getting premium increases are generally still much less expensive than the coverage would cost new today! For instance, a policy for $200/day with lifetime benefits that might have cost $2,000/year if purchased back in 2001 might get a premium increase notification of 50% – which means the premium is jumping up to $3,000. Yet a comparable policy today for the same benefits for the same age could easily cost upwards of $4,000 (and in fact, lifetime benefits aren’t even available anymore!). In other words, even after the premium increase, most older policies are still cheaper than equivalent new policies today. And of course, if the client actually bought the policy 11 years ago, then the daily benefit would not be $200/day but would be up to about $350/day with inflation adjustments; getting that policy new in today’s marketplace could cost nearly $7,000!

So by comparison, while a surprise premium increase from $2,000 to $3,000 may be a very unpleasant shock, it still represents a fantastic deal for the coverage going forward from here. In turn, this means that if the policy is still affordable, it virtually always still is a good financial decision to keep the coverage at the new rates (assuming, of course, that the coverage is still needed in the first place).