If you’re selling clients long-term care insurance, beware that state insurance laws require agents to provide up-front disclosure that premiums could rise in the future.
This disclosure also is required by insurance brokerage firms—no matter how uncomfortable it may be for advisors, says Anthony Domino Jr., a Rye Brook, N.Y.-based financial planner and past president of the Society of Financial Service Professionals.
“Long-term care is relatively new segment of the marketplace,” Domino says. “A lot of insurance companies have issued policies that don’t have mature claims information. They [clients] should expect [a future premium increase]--particularly if they have bought a policy with a lot of bells and whistles.”
Over the past five years, major players in the long-term care insurance market have raised premiums as much as 25 percent, according to the California Department of Insurance. The agency, which lists nationwide rate hikes as far back as 1990, reports that John Hancock Life Insurance recently raised long-term care premiums to 140,000 federal employees. Others that have already raised some policy premiums include Allianz, Bankers Life, Genworth, Monument Life, Mutual of Omaha, Transamerica and UNUM. Published reports have indicated that Prudential and MetLife expect to raise premiums to certain blocks of clients.
Reasons cited for long-term care premium hikes in a report by Steve Poizner, California Insurance Commissioner: Liberal medical underwriting and pricing; policyholders are living longer than expected and incurring more disabilities; rising nursing home costs; poor insurance company investment performance; low interest rates and lower-than-expected lapse rates.
Insurers typically need state approval for rate hikes—but they usually get them.
“Rate increases are not a sign of a `bad' policy and the absence of a rate increase is not a sign of a `good` policy,” Poizner says. “Conversely, just because a company has not had any rate increases does not mean that it never will raise its rates.”
Poizner says advisors may want to consider how carefully a company "underwrites" applicants. There is less risk of a rate increase by companies with stricter underwriting guidelines. If your clients have health problems and they get coverage, prepare them for the possibility of a rate increase in later years.
“It’s a good rule of thumb to build into your calculation and planning an extra amount of 10 to 20 percent as a cushion against the shock of future increases,” Poizner suggests.
Mary Beth Senkewicz, deputy insurance commissioner in Florida’s Office of Insurance Regulation, says that in the 1990s, insurers had limited accumulated claims experience. And state regulators found that many insurers underpriced their long-term care products. As a result, the National Association of Insurance Commissioners has added supplemental requirements for consumer disclosure of rate stability to the NAIC’s Long Term Care Insurance Model Regulations, revised in 2000.
“Although companies need to charge sufficient premiums to remain solvent and pay claims, the regulators believe that consumers must be treated fairly in the pricing of these policies,” she said in a hearing before the Senate Special Commission on Aging last Oct. 14. “Insurers must charge consumers a higher initial rate to limit the potential future increase and insure stability.”
Long-term care insurance can prove very lucrative. Depending on the insurance company and type of policy, commissions can run as high as 50 percent in the first year and 10 percent in every succeeding year, Consumer Union reports.
But unfortunately, if a long-term care policy lapses due to a rate increase, the client generally risks losing coverage. If a client gets hit with a long-term care insurance rate hike, Charles Farrell, financial advisor and attorney with Northern Star Investments, Denver, suggests these options.
* If the client needs the coverage and the carrier is in sound financial shape, the client might consider paying the higher premium.
* To make room in the client’s budget, see if the client has other insurance premiums that might be reduced. It might be possible to eliminate or reduce coverage on an old life insurance policy, or raise deductibles on the client’s home or auto policies.
* The client might consider reducing benefits on the long-term care policy. Instead of a $150 daily benefit, for example, a lower-cost $130 daily benefit might be acceptable. Or, the client might go from a 90 day waiting period to a 180 day waiting period.
* Seeking a new carrier could prove an attractive option for a client in good health. However, the client also could see premiums to a new carrier rise.
* See if the client has the option of salvaging some benefits through a “paid up” policy. With this, the client can stop paying future premiums, and receive a policy equal to already paid-up benefits. However, expect those benefits to be significantly less than coverage under the full policy.
Financial planner Domino says that to find a client the right type of policy, it is important to see where long-term care insurance fits into the client’s financial and retirement plans. He favors standalone long-term care insurance. Nevertheless, annuities or life insurance with long-term care provisions may provide a lower-cost option.
A combination annuity long-term care product often costs less than a long-term care standalone policy, and typically works this way: If long-term care is needed, benefits are paid out first as accelerated benefits, ranging from 1 percent to 6 percent of the annuity’s value, until the money is exhausted. Then, the long-term care benefit kicks in, continuing the long-term care payments at the same monthly level for a specified period, often ranging from 25 to 50 months. If the policyholder never needs to tap the policy for long-term care, they still have the annuity’s cash.
“The tradeoff with combination products is that you give up the annuity earnings if you use it for long-term care,” he says.