LTC premium hikes are coming

As policyholders cling to coverage, insurer costs are rising

Jan 17, 2010 @ 12:01 am

By Darla Mercado

Steep rate hikes are coming for long-term-care policies written a decade ago. Prudential Insurance Company of America expects to raise premiums by 18% to 25% for LTC policies written be-tween 1999 and 2003. Premiums on certain policies from Met Life Inc. — series LTC97 and VIP1 — will rise by as much as 18%. And by March 1, as many as 140,000 federal employees under 65 covered by LTC contracts written by John Hancock Life and Health Insurance Co. will have seen their premiums go up by as much as 25%. The poor performance of the carriers' investment portfolios, as a result of the prolonged low-interest-rate environment and a below-forecast number of policyholders who have allowed their contracts to lapse, are driving the rate increases, said Jeff Lane, an analyst with A.M. Best Co. Inc. In addition, the less rigorous medical standards in place when older policies were written have resulted in an unexpectedly large number of LTC claimants. The magnitude of the coming rate hikes will vary according to the type of coverage and the client's experience in the pool, said Allen Schmitz, principal and consulting actuary at Milliman Inc. Holders of richer LTC policies offering inflation protection or lifetime benefits could face higher rate hikes because more of them than expected are holding on to their policies and beginning to make claims, he said. Although the lag time between an insurer's announcement of a premium hike and the effective date can be a year or longer — as a result of the slow process of regulatory approval by state officials and client notification — financial advisers often are caught off guard by the increases, said Claude Thau, LTC-insurance wholesaler and president of Thau Inc. In fact, they were dismissive of warnings that premiums on inexpensive policies would eventually rise, he said. “They didn't perceive it as a risk, because they had never seen a rate hike,” Mr. Thau said. “Nowadays, they're much more cautious than they used to be.” Advisers argue against dropping LTC coverage, saying most of their clients will be able to absorb the coming rate increases.

“When comparing the $200 to $800 incremental increase relative to what the benefits are likely to be, and the potential cost of coverage, it's still an expense they ought to pay,” said D. Randolph Waesche, president of Resource Management Inc., which manages $700 million.

“I'd rather see them cut back on their cable bill if we had to look at an itemization of where the re-sources will come from,” he said.

“We have almost universally recommended that the client maintain the policy, and we've been fortunate enough that the incremental increase in cost hasn't been a meaningful burden to the client,” Mr. Waesche said.

At the time the policy is purchased, clients and advisers alike should consider the likelihood of a massive rate hike sometime during its life, said Tom Hebrank, a LTC specialist at Advanced Planning Solutions Inc., which acts as a consultant to advisers.

“The public assumes that there won't be rate hikes or, if there are, they'll be like health insurance and rise 8% or 9% a year,” he said.

“Couching the possibility of a rate hike appropriately is the best way to help clients understand it from a budgeting perspective. If they can't afford a 20% rate hike, they shouldn't get the policy,” Mr. Hebrank said.

Still, there are alternatives to consider. Often when carriers raise premiums, clients can choose to reduce their coverage by lowering their daily benefits or opting for a shorter-term plan, Mr. Hebrank said.

Even for high-net-worth clients, a rate increase can require a rethinking of discretionary expenses, noted Michael Kresh, president of M.D. Kresh Financial Services Inc., which manages $100 million. For other clients, higher premiums may lead aging policyholders to ask their children to help pay for the insurance.

“The kids are mumbling about whether they want to pay,” he said.

Rather than advise them to drop the coverage, Mr. Kresh sometimes counsels older clients to buy into continuous-care communities, where residents are offered a continuum of care all the way up to nursing home services.

“The cost isn't cheaper than the policy itself, but it's cheaper than the cost of paying for your own long-term care,” he said, adding that policyholders also can use their LTC insurance to foot part of the bill.

E-mail Darla Mercado at -dmercado@investmentnews.com.

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