When people live past 65, there is a high probability that they will need some form of long-term care.
A major problem for many insurance companies in the long-term care industry is that they are not profitable or are losing money. People are living much longer now than when many of the LTC policies were sold. Many of the assumptions actuaries used proved to be erroneous.
For example, it was commonly assumed that 5 percent of policyholders would allow their policies to lapse annually. In fact, only about 1 percent of policyholders have done so.
Another assumption was that insurance companies would be able to invest their capital at a 7.5 percent return. Interest rates, however, have remained below historical levels, and returns in 2017 were approximately 4.6 percent, according to A.M. Best.
Many insurance companies offering LTC policies have either gone out of business or discontinued selling the policies. Most of the companies that remain in the business have taken steps to increase premiums for both existing policyholders and new customers.
Insurance companies cannot arbitrarily raise premiums for existing customers without the approval of the state insurance department. When premium increases have been granted, they have more than doubled. For those who had the foresight to buy these policies many years ago, it seems very unfair.
The majority of policyholders expected that their premiums would remain fixed. Unfortunately, I am not aware of any insurance company that guaranteed premiums would not increase.
Policyholders who have seen their premiums raised significantly are faced with three unpleasant options: pay more, allow their policies to lapse or accept less coverage. This seems unfair because when they bought the policies, they were under the impression that premiums would be stable.
With most other policies, such as term life insurance or standard whole life policies, the premiums are fixed. Now facing substantial premium increases, policyholders are understandably very upset with their insurance companies.
Another factor that makes the situation worse is that many of these policyholders have already retired and have few or no options to increase their income to be able to afford premium increases.
Insurance companies can go to their state insurance departments and try to obtain approval for premium increases. If the insurance department refuses to approve the increases, the insurance company — facing large losses — may have to liquidate.
When an insurance company is forced to liquidate, the policyholder generally loses some coverage. There is no guarantee, when a company does liquidate, that policyholders will receive the coverage they initially contracted for.
The bottom line is that anybody considering buying a standard LTC policy should understand that there is no guarantee that these premiums will be fixed. Prospective policyholders should determine the past history of the company regarding approved premium increases.
They should also review the financial rating of the insurance company, specifically their A.M. Best rating. Only consider companies with top ratings.
Another consideration is how long the company has been offering these policies. Currently, only about a dozen companies still offer LTC policies.
I suggest you only consider companies that have been in this business many years, have an excellent financial rating and have not increased their rates or have only increased premiums minimally.
Elliot Raphaelson welcomes questions and comments at email@example.com.