Archive for December, 2010

Turmoil in the Long Term Care Insurance Industry?

December 28, 2010

John Hancock Life Insurance Company seeking a 40% average rate increase on older policies!  Met Life to stop selling long term care policies!  Genworth asks for 18% rate increase on older policies!  These headlines are enough to keep me awake at night.  What is going on?

The long term care insurance industry is not immune from change.  While the details may be different, the business of insurance is affected by the economic forces swirling around us.

With regard to rate increases, the problem is with older long term care insurance policies that were badly under-priced.  The pricing assumptions were wrong.  How could that have happened?  Don’t insurance companies have actuaries…who are paid to make accurate predictions…for twenty or more years down the road?

1. Ten-twenty years ago, when these policies were developed, there was very little claims data.  What little information was available led the actuaries projections to be way off.  The good news for policyowners is that more claims are being filed (and paid) than expected, claims are happening at younger ages than expected, and claims are lasting longer than expected.  People are really using their policies.  The bad news is that rates need adjustment. 

2. Interest rates are now at historic lows.  No one predicted this was going to happen.  One of the factors taken into account when pricing an insurance policy is the expected return on invested premiums.  Expected investment returns are used to reduce what would otherwise be a higher premium.  Expected investment returns were significantly overstated.

3. “Expected Lapse Rate”.  Based upon other insurance products, companies estimated that the lapse rate for long term care insurance would be about 7%.  A lapse rate of 7% means that 7% of all in force policies are “lapsed” (or cancelled) each year.  The insurance company keeps the premiums that have been paid on  a policy that subsequently lapses without ever having to pay a claim.  This too is factored into determining how much premium to charge.  Actual experience has been an industry-wide lapse rate of less than 1%.

Over the years, each new policy design series introduced in the market by an insurance company has been priced higher than the one before it.  This was done to reflect the emerging knowledge of what a sustainable premium level needs to be.  Example: If my wife and I could buy policies today that replicate what we did buy in 2001, but at our 2001 ages, today’s policy would be 56% more expensive.  Looking at it another way, our policies have a $200 daily benefit amount, an unlimited benefit period, and 5% compound inflation  protection (I would have designed our policies differently, knowing what I do now.).  Those policies bought today at our current ages would cost 3.4 times what we are paying…and this assumes we would both still qualify for the best rate class.  These are real numbers which I would be glad to share with you on an individual basis.

I almost forgot…Met Life has stopped selling long term care insurance.  Insurance company product lines come and go all the time.  Question #1 is always: “Can we make as much selling this product as we can selling that product?”  Question #2  is: “Do we want to continue deploying the resources necessary to be a player with this product?”.  Purely a business decision.  Met believes is can make more money by devoting its long term care resources to another product line.  Be assured that Met Life will continue to honor all of its existing policies.  They have no choice.

As I write this, I am sure there are insurance companies contemplating entering the long term care insurance market.  Some others, with older underpriced policies are likely thinking about asking for rate increases.  In the meantime, people without long term care insurance continue to self-insure thus placing their own assets at risk.

The core need for protecting assets, care choices and ultimately human dignity has not changed.  We still have a bunch of solid, quality insurance companies offering quality long term care insurance at affordable prices.  Neither I nor the need are going away.  The lineup of carriers, policy benefits and prices will continue to change…as will everything else.  As an independent broker, I shall continue to search and then advocate for what I believe to be in my clients’ best interests. 

Wishing you a happy, healthy and prosperous New Year.

Disclaimer

Actual policy language, rather than the contents of this eNewsletter always takes precedence.  Long term insurance policies vary from company to company & as well as within the same insurance carrier.  Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice.  Consult your tax advisor or attorney for these matters.

 

© Raymond Smith, The Long Term Care Specialist, 2010

Elimination Period: 30/60/90

December 25, 2010

After meeting either the Activities of Daily Living (2 out of 6) or Cognitive Impairment LTC insurance benefit triggers (See above article, Policy Benefit Triggers…), how long must I wait before beginning to accrue benefits?  This question is answered by your policy’s Elimination Period.  Depending upon insurance company, the Elimination period may be zero days, 20 days, 30 days, 60 days, 90 days, 180 days, 365 days, or even longer.  Typically you will have a choice of three or four with the most common being 30 days, 60 days, or 90 days.

As with all things insurance, the choice of Elimination Period is a trade-off.  A 30 day Elimination Period means that you are only on the hook for the first thirty days of  care.  This is good, but the policy will also be more expensive than say a 60 day or 90 day Elimination period.  Remember that the number of days will apply when you actually need care, not today.  You should consider what the cost of care may be in the future because of inflation.  All this being said, the most often selected Elimination Period, industry-wide, is 90 days.

So how shall I count the days?  The industry uses three methods of counting Elimination Period days.

Very important!  With most but not all policies, the Elimination Period need only be satisfied once per lifetime.  Futhermore the full number of days does not need to be satisfied during one period of incapacity.  Policy provisions do vary, so check carefully.

Calendar days: Starting with when you are certified as needing assistance with at least 2 of the 6 Activities of Daily Living (or are determined to be cognitively impaired), every day is counted, whether or not you have received long term care services.  This is the most generous definition of Elimination Period days.

Service days: Starting with when you are certified as needing assistance with at least 2 of the 6 Activities of Daily Living (or are determined to be cognitively impaired), only days in which you receive and pay for long term care services are counted.  This is the most restrictive definition of Elimination Period days.

Hybrid: A common example is “One or more days of paid care in a week are counted as seven Elimination Period days.”.  This is a reasonable cost/benefit trade-off.  Often, the need for long term care services begins with Home Care and only for a few days per week.  The hybrid definition of Elimination Period days works very well in this situation without incurring the greater expense of the callendar day definition.

A few examples, all involving a 30 day Elimination Period.

1.  A policyowner is certified as needing assistance with bathing and dressing, but the family pitches in and provides all needed assistance for the first 30 days.  Care is needed seven days per week.  Result:

    a. Calendar Days: At the end of 30 days, the Elimination Period has been satisfied.  No out-of-pocket cost, but family members provided all needed care.

    b. Service Days: None of the Elimination Period days have been satisfied as no paid care had been utilized.  Note: most policies do not pay a benefit when family members or friends provide care.

    c. Hybrid: At the end of 30 days, the Elimination Period has been satisfied.  Again, no out-of-pocket cost, but family members provided all needed care.

2. A policyowner is certified as needing assistance with bathing and dressing.  A Home Care Agency is engaged to provide two hours of assistance, one day per week (primarily for bathing).  The family provides assistance with dressing during the other 6 days per week.  For puposes of simplification, assume 30 days to have exactly 4 weeks.  Result:

    a. Calendar Days: At the end of 30 days, the Elimination Period has been satisfied.  Minimal out-of-pocket cost for 2 hours of paid care per week.  The family provided care for a few hours per day, six days per week.

    b. Service Days: At the end of 30 days, only four Elimination Period days have been satisfied.  At this rate, it will take another 26 weeks to satisfy the Elimination Period and begin accruing policy benefits.  There was minimal out-of-pocket cost for 2 hours of paid care per week.  The family provided care for a few hours per day, six days per week. 

    c. Hybrid: At the end of 30 days, 28 Elimination Period days have been satisfied (actually, all 30 days have been met).  There was minimal out-of-pocket cost for 2 hours of paid care per week.  The family provided care for a few hours per day, six days per week.

 

Disclaimer

Actual policy language, rather than the contents of this eNewsletter always takes precedence.  Long term insurance policies vary from company to company & as well as within the same insurance carrier.  Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice.  Consult your tax advisor or attorney for these matters.

 

© Raymond Smith, The Long Term Care Specialist, 2010