YOU HAVE QUESTIONS. WE HAVE ANSWERS. Explaining the issues currently affecting long-term care insurance. What s going on? Why are carriers such as MetLife discontinuing new sales? Why are we bullish about LTCi and long-term care planning?
What s going on? There is a lot of talk about long-term care insurance because of two issues: premium increases on in-force policies from major carriers like John Hancock, Genworth and UNUM plus a major company, MetLife, leaving the business altogether. Let s talk about the first issue in-force premium increases. In November, John Hancock announced increases averaging 40 percent on the majority of their LTC business. The reason given by John Hancock had to do with worse experience than anticipated from a morbidity and mortality perspective. More policyholders are having a higher incidence of claims, and those claims have a longer duration than expected. Interestingly enough, however, the salvage rate, or how much of the daily benefit that people are using, is less than expected meaning some policyholders may have more benefits than they need. With Genworth, the issue had to do with lapse assumptions of older policies more people kept coverage than anticipated. According to the AALTCI over EIGHT MILLION Americans own long-term care insurance. 1 Why are the proposed premium increases so large? The increases seem so large because the carriers can t simply request a more modest adjustment annually these guaranteed renewable products are not designed for that. The increases are filed on a state-by-state basis and must be shown to be actuarially necessary. In the case of John Hancock, they are using guidelines under the 2000 NAIC rate stability legislation, which states: 85 percent of the premium increase dollars received must go towards claim costs. The increased premium however, will be lower than new business rates. Since January 1, 1990 of a sample of active carriers, 56 percent (15 of 27) have never exercised a rate increase in at least one of the 50 states. 2 You have questions we have answers. Explaining the issues currently affecting long-term care insurance. November 30, 2010 2 Sources: 1 2010 AALTCI Sourcebook; 2 California Department of Insurance
Are premiums being increased because of low interest rates and the insurance carrier s investment income? That can be a factor, but not one that is cited by John Hancock or Genworth. Generally speaking, premium payments only account for 40-60 percent of the cost of coverage. The rest comes from the insurer s return on their investments. When the interest rates drop, investments no longer generate enough income to pay for anticipated costs of claims. Long-term care was designed to handle short periods of low interest rates, but if the rates remain very low for a few more years, insurers may need to raise rates to guarantee they will have enough funds to cover future claims. This impacts some carriers more than others, depending on how their portfolios are structured and whether they made long-term investments with rate guarantees. John hancock pays out 1.5 Million dollars each day in claims. 3 Based on experience with previous premium increases, what are clients likely to do? A large percentage of clients will compare what they would pay with the increase to what is currently available in the market and simply accept the premium increase. Another group will adjust benefits. John Hancock has proposed creative ways to keep the same premium by simply adjusting the inflation amount on a go forward basis. For example, someone with a lower than 5 percent compound inflation rate might be provided the opportunity to keep their current premium and move to a 4 percent inflation rate. Given the current inflation environment, it might be a sound decision. LTCI Partners can assist with in-force policy reviews to help clients and advisors make the best choice. Despite recent in-force rate increases industry lapse rates hover around Two Percent long-term care insurance is a very persistent product line compared to other types of insurance. 4 You have questions we have answers. Explaining the issues currently affecting long-term care insurance. November 30, 2010 3 Sources: 3 Genworth Financial, March 31, 2010; 4 2010 AALTCI Sourcebook
What are some of the little-known consumer protection features of long-term care insurance? One benefit that is taken for granted is the waiver of premium or joint waiver of premium feature when someone is on claim, premium payments are suspended. Most plans also feature a contingent non-forfeiture benefit. If a carrier has a series of premium increases, policyholders can elect to have their policy be considered paid-up, and all premiums paid in are then available as benefits. Why have some companies never increased premiums on in-force policies? There are some mutual companies, such as New York Life and Northwestern Mutual, that have not raised premiums on in-force business. Some of those products were priced higher than others at the time of issue and they have much smaller in-force blocks of business, so they have not had much claims experience yet. These carriers with higher initial premiums have had difficulty establishing business in a brokerage distribution model where carriers premiums are shown on a side-by-side comparison. Mutual companies also claim that they have a lower required ROI (return on investment) than some typical stock companies, which can affect pricing. Why are carriers such as MetLife discontinuing new sales? LTC Insurance can be a challenging business and MetLife is uncomfortable with the current plan designs in their product portfolio. Insurance company missteps on underwriting and actuarial assumptions can have significant consequences. MetLife has stated they will continue to explore potential LTC planning solutions, including combining LTCi with other products. You have questions we have answers. Explaining the issues currently affecting long-term care insurance. November 30, 2010 4
What happens to existing policyholders for companies no longer selling new policies? MetLife s move is not unprecedented. For example, CNA Insurance was a large writer of long-term care insurance in the 90 s and stopped writing individual business when they decided to exit the life and health insurance businesses to focus on property and casualty products. their contract. Nothing changed for them. Second, even with premium increases, and assuming insurable health, current plans would be more expensive. Third, current policy administration is in the capable hands of an expert third party organization, Univita, who has an excellent reputation for service and claims paying. However, very few of the CNA policyholders dropped coverage or switched LTC carriers. Why? First, even though CNA isn t selling new policies, existing customers had a contractual agreement from financially strong CNA to pay for LTC benefits per Genworth financial holds over 16.52 Billion dollars in reserves to pay future long-term care insurance claims. 5 Okay, but what if that company becomes insolvent (goes under)? If an LTC Insurer is liquidated, benefits are paid through the states health insurance guarantee association. However, those benefits might be limited to a set dollar amount, such as $300,000. More information is available at the National Organization of Life & Health Insurance Guaranty Associations website www.nolhga.com. For People over the age of 65 70 Percent will require some long-term care services at some point; more than 40 percent will need care in a nursing home. 6 It should be noted that there are no LTC carriers currently in liquidation. One company that ran into trouble, Penn Treaty, is in rehabilitation and may be in liquidation pending a court decision. Another company, Conseco, decided to exit the business and transferred many of its LTC policies to Senior Health Insurance of Pennsylvania, a state-supervised, not-for-profit trust. More than 140,000 policyholders reside in this trust. It is smart to pick a company with a solid financial record to avoid the above situations. You have questions we have answers. Explaining the issues currently affecting long-term care insurance. November 30, 2010 5 Sources: 5 Genworth Financial, March 31, 2010; 6 United States Department of Health and Human Services, September 2008
Some companies have also suspended new group LTC sales. Why? In recent years, group LTCi has added benefits to resemble individual LTCi products. However, group plans typically have limited or guaranteed-issue underwriting. With low participation rates for group plans, there is some concern that adverse selection will affect group blocks of business. MetLife stopped new group sales a few years ago, and in November, John Hancock suspended group sales. UNUM, Prudential and Genworth are still active in the group market, but expect a careful approach to guaranteedissue plans. At the same time that some carriers have scaled back group plans, more carriers are offering multi-life individual plans with discounts and a simplified enrollment process. Terry savage, chicago sun-times, november 15 th 2010 These policies were such a good deal that the companies were losing money on them. If you had followed my advice to limit payments to 10 years, you d have a fully paid-up policy now a valuable asset. How will the CLASS Act, the new government-run long-term care plan that was included in health care reform, affect LTCi? The CLASS Act is a voluntary long-term care plan that was part the CLASS Act plan. Premium estimates have ranged from $120 of health care reform. Details are still being finalized, but the plan to $240 dollars per month and concern about adverse selection is is expected to offer an average daily benefit of $50 per day, much high. Private, medically underwritten coverage may be able to offer less than the typical cost of care. The plan will be voluntary to all more competitive premiums and could greatly increase employer working Americans, with premiums yet to be determined. There is interest for private LTC coverage. a five-year wait for benefits and the plan is guaranteed issue. Because of the guaranteed issue nature, The number of persons aged 65 or over is expected to double in the next 20 years; there will be many actuaries are concerned about the participation rate and initial premiums for 110 percent more people 80 or older. 7 You have questions we have answers. Explaining the issues currently affecting long-term care insurance. November 30, 2010 6 Sources: 7 United States Census Bureau, News Release, August 14, 2008
Are there any strategies to avoid in-force rate increases? Those who purchased 10-pay plans and have completed paying premiums are feeling pretty good about their decision. Ten-pay and limited-pay plans are still ways to reduce exposure to rate hikes, but there is a cost to that acceleration. Other options include single-pay LTC plans and combination Life/LTC and Annuity/LTC plans. However, the best option might still be the annual pay plans, even assuming potential premium increases. A good rule of thumb is to assume 1 to 1.5 percent increases annually over the course of premium payments. Of course policyholders may not see that, but factoring that into a budgeting process will help manage expectations. Why are we bullish about long-term care insurance and long-term care planning? Fiscal reality means there will be limits to the amount and quality of care available through Medicare and Medicaid. The latest estimate from Fidelity states that boomers will spend an average of $250,000 in out-of-pocket costs for medical care, not including long-term care costs. Insurers see an opportunity to profit from this market opportunity, but first they need to feel comfortable with plan designs. In the meantime, there may be some good opportunities for advisors to sell current plan designs that offer more generous benefits than new products coming on the market in the next few years. over the past 15 years there has been a 900 percent increase in the number of employers installing Group LTCi programs. 8 Sources: 8 LIMRA Research, 2008-2010 You have questions we have answers. Explaining the issues currently affecting long-term care insurance. November 30, 2010 7
How can I stay informed on changes in the LTC business? One of the most essential pieces of a sound financial plan is long-term care insurance. Because of its importance, and the difficulties involved in staying on top of such a dynamic market, LTCI Partners has designated a national platform to provide expert assistance to advisors as they look to provide the best advice to their clients. LTCI Partners is available to provide you assistance with everything from pre-screening and proposal preparation, to obtaining applications and answering your client s questions. Updated www.ltcipartners.com Register for Producer Access to get news alerts, product updates and various unique industry insights Planning for LTC in America Blog For the latest news and articles on long-term care, visit our blog at www.ltcipartners.typepad.com Group LTC & CLASS Act Benefits Journal and Guide For more on the CLASS Act, visit our blog at www.ltcipartners.typepad.com/group_longterm_care_insur/ Download your free guide to what you need to know about the public option at www.ltcipartners.com/class_act/ Carrier News Updates For carrier news, visit our blog at www.ltcipartners.typepad.com/carriernews Associations and Advocacy American Association for Long-Term Care Insurance www.aaltci.org The Center for Long-Term Care Reform www.centerltc.com American Council of Life Insurers www.acli.com National Association of Health Underwriters www.nahu.org National Association of Insurance and Financial Advisors www.naifa.org The information presented in this special report is the analysis and opinion of LTCI Partners, LLC. For carrier specific questions, please contact the insurers. For representative and agent use only. Not for use with the general public. LTCI Partners, LLC is a subsidiary of National Financial Partners Corp. LEG-COBV0025-03