Insurers becoming more stringent with long-term-care policies

This is both good and bad news for advisers — clients may be declined coverage more often, but those with policies may see fewer rate hikes.

Insurers are getting pickier about who qualifies for a long-term-care insurance policy — good news for the long-term health of an otherwise ailing industry, but potentially bad news for clients who find it harder to qualify for coverage.

Companies have been declining coverage for would-be purchases of traditional LTC policies more frequently, across a variety of age bands, according to new figures published by the American Association for Long-Term Care Insurance.

The portion of applicants below age 50 who were denied coverage for a traditional policy swelled to 20% in 2017, up from 12% in 2013. The share of 50- to 59-year-olds who were denied increased 5 percentage points over that period, to 22%; 60- to 69-year-olds also saw a 5-percentage-point rise, to 30%.

The only age group that didn’t see an increase in the decline rate was 70- to 79-year-olds, whose rate was flat at 44%.

Applicants for long-term-care policies must undergo a health assessment from insurance companies, which then use information from the health screening to determine who does and does not qualify.

Jesse Slome, executive director of AALTCI, said there are fewer insurers in the marketplace than there were five years ago, and the remaining companies, of which roughly 10 are issuing new policies, are underwriting applicants more thoroughly.

“If you start accepting unhealthy people, your claims are going to be higher than you expect, and that’s when you have to go in for rate increases,” Mr. Slome said.

Sales of traditional LTC policies have declined precipitously over the past two decades or so. Just shy of 70,000 individual policies were sold in 2017, a tenth of the sales seen in 2000, according to AALTCI data.

Several insurers — John Hancock Life Insurance Co. is a recent example — have decided to exit the business altogether. Others, such as Penn Treaty America Insurance Co. and a subsidiary, have liquidated.

“Don’t expect liquidations or bankruptcies, but they do occur from time to time,” Randal J. Freitag, chief financial officer and head of individual life for Lincoln Financial Group, said during the company’s recent Q1 earnings call with analysts.

Consumers and financial advisers have migrated away from traditional LTC insurance, partly because of rate increases levied on legacy blocks of in-force policies that insurers had mispriced originally. A combination of low interest rates, increasing longevity and a spike in health care costs contributed to the financial necessity for price increases.

Rate hikes can put a financial strain on consumers, though, if they don’t have the bandwidth to absorb the additional costs. And they may also get frustrated with their financial advisers if they’re blindsided with higher annual fees.

“Even though it’s not necessarily my fault the insurer is raising rates, it reflects negatively upon me. It shouldn’t, but it does,” said Thomas Henske, a partner at Lenox Advisors Inc. “For agents, it can be guilt by association.”

Insurers’ more stringent requirements for issuing policies is welcome news for Mr. Henske.

“I would much rather they be finicky with who they take on than be liberal with it and put all my clients at risk for a rate hike,” he said.

Insurers such as Lincoln Financial have alluded to their ability to assess risk and price LTC products more accurately, given a better understanding of the market dynamics.

“Having significantly more experienced data … really allowed us to develop a set of assumptions around [policy lapse], morbidity incidents, those sorts of things that really reflected all of the bad experience that the traditional LTC players are having to reflect in their models today,” Mr. Freitag said.

Lincoln doesn’t sell traditional LTC policies; it offers a hybrid product combining life insurance and LTC benefits. These sorts of products have grown in popularity among advisers and consumers — Mr. Slome said there are now roughly three or four of these policies sold annually for every traditional LTC policy.