Why Are Traditional Long-Term Care Insurance Premiums Rising So Rapidly?

Many policyholders with traditional long-term care (LTC) insurance are facing significant premium increases, often exceeding 50% or even doubling. These hikes are not arbitrary but stem from a combination of factors that have challenged insurers' original pricing models.

Underestimated Lapse Rates

Initially, insurers anticipated that a significant percentage of policyholders would let their policies lapse before making claims. However, actual lapse rates have been much lower, with some studies indicating rates as low as 1%. This means more policyholders are retaining their coverage into older age, leading to higher-than-expected claim rates.

Longer Life Expectancy and Increased Utilization

Advancements in healthcare have led to longer life expectancies, resulting in more individuals reaching ages where long-term care is needed. Additionally, the prevalence of conditions like Alzheimer's disease has increased, leading to longer durations of care and higher costs per claim.

Low Interest Rate Environment

Insurers rely on investment income to help pay future claims. The prolonged low interest rate environment over the past decades has reduced the returns on insurers' investments, making it more challenging to meet future obligations without adjusting premiums.

Regulatory Approvals and Rate Increases

To ensure they can meet future claims, insurers must obtain approval from state regulators to increase premiums. These approvals are based on actuarial analyses demonstrating the need for higher premiums to maintain the financial health of the insurance pool.

Options for Policyholders

Facing premium increases, policyholders often have choices:

• Accept the Increase: Continue paying the higher premium to maintain existing benefits.

• Reduce Benefits: Lower the daily benefit amount, shorten the benefit period, or remove inflation protection to keep premiums more affordable.

• Nonforfeiture Options: Some policies offer a reduced paid-up benefit, allowing policyholders to stop paying premiums in exchange for a reduced benefit amount.

Conclusion

The rise in traditional LTC insurance premiums is a result of initial underestimations and changing demographics. In many cases, accepting the increase is the best option due to the increased likelihood of needing the benefits, your current age and health, and the length of time you’ve already paid into the contract.

Before making any decisions, it’s important to discuss the options with your advisor.  We can explain the pros and cons and provide clarity to help guide you in making the best choice for your individual situation. 

Long-term care insurance policies contain exclusions and limitations. Eligibility for long-term care insurance, additional policy benefits and qualification for benefits is determined on a case-by-case basis. Guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company. For costs and complete details of coverage, please contact your financial advisor.