Their Loss, Your Gain Adam M. Grossman | June 27, 2021
LONG-TERM-CARE insurance policies are, in my opinion, both a blessing and a curse. They’re a blessing because they can help cover critical and costly care when a family might have no other financial options. But they can also feel like a curse. That’s because of what many owners of traditional long-term-care (LTC) insurance refer to as “the letter.” This is the renewal letter that policyholders receive each year.
These letters provide a menu of renewal options, each of which offers some combination of premium increases and benefit cuts. But unlike most insurance policies, which might impose a modest or at least manageable increase each year, it isn’t uncommon to see LTC premiums jump by 10%, 20% or more—sometimes much more.
As a result, the options in these letters generally range from unpalatable to unaffordable to downright depressing, plus the decision is often complicated. These letters frequently present a matrix of choices, with options along multiple dimensions, including:
Maximum daily benefit Inflation benefit
Elimination period Benefit period Total lifetime benefit
Cash payment to policyholder
Because there are so many variables, the renewal decision defies straightforward cost-benefit analysis, making it an agonizing annual dilemma for policyholders. If you or a family member has one of these policies, how should you approach the decision? Before getting into the details, it’s important first to understand some background—in other words, why these letters are even necessary.
The fundamental problem in the LTC market isn’t difficult to grasp: When insurers created these products, they miscalculated and priced them far too low. There were three reasons for this: Health care costs have increased much faster than expected. Over the past 20 years, health care inflation has outpaced the overall inflation rate by almost 1½ percentage points a year. Compounded over time, the result has been a steep increase in the size of claims.
Policyholders held on to policies much longer than expected. With a product like long-term-care insurance, the most profitable customer is the one who pays premiums for a period of years but then cancels before ever making a claim. LTC customers, however, didn’t cancel at nearly the expected rate.
Genworth, the largest player in LTC coverage, expected a lapse rate around 5%. But the actual rate has been an order of magnitude lower—just 0.7%. Interest rates have been much lower than expected. Since insurance companies invest a large part of the premiums they receive in bonds, this has been an increasing problem. In fact, the timing couldn’t have been worse. Interest rates have been falling since the early 1980s, which is precisely when LTC policies started to become popular.
More than any other kind of coverage, this has been a problem for LTC insurers because these policies are intended to be lifetime commitments, and yet the longest-term bond is just 30 years. Insurers weren’t able to fully protect themselves by matching assets and liabilities, as they normally do. This has spurred some insurers to offer a different type of LTC insurance—known as hybrid policies—which haven’t had these pricing problems. Indeed, traditional LTC insurance has been a disaster for insurers.
Genworth alone has incurred billions in losses on its LTC business. Losses there have averaged $425 million per year in recent years. To stop the bleeding, insurers are doing everything they can to fix the pricing on these policies. That explains the frequently brutal renewal terms.
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