Raskin Planning Group

Yikes! My Long Term Care Insurance Premium Increased Ninety Percent! What do I do now?

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A colleague of mine recently asked me to help him with a unique client situation. Here is some background:

Raskin Planning Group was asked to review a long term care insurance policy (LTCi) of the client. The insured, a Texas resident, was recently notified of a 90% rate increase. The client called his agent who sold him the LTCi policy and expressed his dissatisfaction. The agent heard the client's concerns and came up with a solution: replace the existing insurance with a new LTCi policy. My colleague suggested the agent prepare an analysis, comparing the existing policy to the new policy. Instead, the agent prepared a variety of replacement proposals with no analysis.

It was at this point in time, we were asked to help out.

We requested and promptly received copies of the existing LTCi policies, the letter describing the rate increase and the proposals for new LTCi. Before taking on this project, I shared with my colleague three fundamental bias I have concerning LTCi:

  1. LTCi should be considered an important part of an overall retirement and estate plan.
  2. Existing policies that were issued over the last 10 to 15 years tend to be less expensive and, if structured properly, might offer reasonable benefits, compared to newly issued policies.
  3. Underwriting new LTCi is more difficult today than it was just a few years ago. That means more people are denied or charged more due to their health history.

After completing our review of the existing LTCi policies and reviewing the proposal for a new policy, we arranged to speak with the client. I asked him what he liked and didn't like about the existing policy. His primary concerns were the recent rate increase and the probability that rates would continue increasing.

I explained that LTCi policy premiums are typically not guaranteed. If the company wants to increase premiums, each state must approve the rate increase. The insurance company submits evidence, state by state, that policy rate increases are justified. Each state needs to balance the needs of a financially solvent insurance company with the needs of the consumer. In general, rates have increased recently because insurance companies have significantly underpriced their contracts. As it turns out, the insurance industry made three incorrect assumptions:

  1. People are living longer and, therefore, long term care claims have exceeded expectations.
  2. The insurance industry assumes that a certain percentage of policyholders will "lapse" their contracts and the insurance company won't have to pay a claim on these lapsed policies. This was a incorrect assumption. Fewer people are surrendering their policies than expected.
  3. Interest rates have dropped significantly and have stayed low over the last six years. The insurance companies assumed higher rates of returns on their investments, and therefore, they believe they need to increase premiums to make up the difference.

In general, new policies are more expensive today, benefits have been reduced and underwriting requirements are stricter. New policies are probably priced more accurately as insurance companies have a better handle on claims, but we don't know if rate increases will continue.

Some states have limited the rate increases requested by insurance companies. Recently, one insurance company stopped selling policies in Massachusetts and New Hampshire because requests for rate increases were denied.

We reviewed the proposals offered by the agent. He was suggesting a hybrid Life/LTCi policy from a quality insurance company that offers excellent benefits and a guaranteed single premium. No future rate increases was a very appealing feature to the insured. However, the new policy design did not include inflation benefits which his existing policy offered. Assuming the insured or his wife did not make a claim until age 80, 15 years from now, the existing coverage may provide $300,000 per insured, more benefit than the new policy.

After reviewing the costs and benefits of the new contract versus the existing LTCi policies, the client decided to retain his existing contract. This is the appropriate decision even if the existing LTCi policies premiums continue to increase.

Financial products like LTCi are complicated and can be frustrating. That doesn't mean they are bad products and inappropriate. Sometimes, we simply don't have a complete understanding or a clear memory of how these products work and how they can help us meet our financial objectives. In this case, a simple reminder and review of the existing LTCi policies kept the client focused on his overall financial goal which was helping pay the future costs of a long term care claim.

Don't hesitate to call us at the Raskin Planning Group to review or remind you how an existing financial product works and fits into your comprehensive financial plan.

Peter Raskin is a registered representative of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker-dealer (Member SIPC). Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. 125 Summer Street, Suite 1400, Boston, MA 02110 617-728-7444. Raskin Planning Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-1075624-120914

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