If you’re reading this, then you know about long-term care insurance rate increases (if you haven’t read our previous piece on rate increases, please do so now and come back when you’re finished).
Long-term care insurance was historically underpriced considering today’s reality of the need for LTC services and supports.
“An estimated 50 million people will be 65 and older by 2020, and almost 50% of them are expected to use formal, paid long-term care support and services” (The SOA Pricing Project).
Fortunately, we have decades more data now than we did at the beginning of LTC sales. In 2016, The Society of Actuaries synthesized this data into a report called Long-Term Care Insurance: The SOA Pricing Project. The most important finding? “LTC policies priced today are significantly less likely to need future premium rate increases than any earlier product generation.”
Still, clients—and even brokers—are quick to point to the potential for rate increases on Tax Qualified LTC plans. “Agents selling LTCI have understandably felt an incredible amount of disillusionment and betrayal from the large-scale implementation of LTC rate increases over the past 15 years,” the SOA recognizes. Carriers will have to regain the trust of many producers.
However, it is also true that to “make an informed purchase today, LTC buyers must be equipped with the context of those rate increases, namely that they are based on an earlier understanding of LTC risks” (SOA).
In today’s marketplace, continuing to avoid long-term care insurance because of rate increase history is like refusing to drive a car because they didn’t use to have airbags.
The gross underpricing of LTCi was due to the scarcity “of actual claims to analyze, a crippling interest rate environment, and the revelation that policyholders maintain their policies far longer than originally anticipated,” the SOA states. People keep paying for what they truly believe they will need.
A few main reasons for the mispricing include:
Lapse ratios (They thought lapse ratios would be 5%. They are less than 1%.)
Interest rates (They were banking on 7% interest rates. They were less than 2%.)
Pricing margins (They thought they would have margins of 10% or more. Margins were 0% in 2000.)
Therefore, “…as claim margins increased, persistency rose, and as investment earnings fell, premiums increased” (SOA). Prices have been adjusted accordingly.
The SOA confidently states that “because of the growing volume of empirical data and the resulting improvement in data credibility, the potential for future rate increases on new LTC products has fallen in each of our study years and is now the lowest it has ever been.”
The persistent drumbeat of rate increases on older policies has rattled policyholders and brokers—but we have safety standards now.
As soon as we started hearing the music, we knew that LTC carriers were going to face an uphill battle to win back the confidence of consumers and advisors alike.
But those who are curious enough to examine the data will realize that the likelihood of rate increases for a policy sold today is far less than those policies that have been sold in the past.
We’ve got airbags. We’ve got seatbelts. We’ve got blinkers and safety standards. The entire industry has changed. So don’t be so quick to dismiss LTCi as a solution for your client.