The Advent of Long-Term Care Insurance

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The Advent of Long-Term Care Insurance

The issue of long-term care (LTC) insurance rates—especially rate stability—has always been among the consumer’s biggest worries when thinking about this coverage. It has been problematic for the insurance industry and its regulators as well.

The context for long-term care insurance

LTC insurance is relatively new (compared to life insurance, for example). The insurance industry and regulators acknowledge that only 20/20 hindsight several decades from now can give them the most reliable data and rate-setting expertise, like that available in the older policy lines. Quality long-term care insurers should—and do—make allowances for this smaller body of information they must work with.

Good, sound LTC insurance cannot be offered with low premiums, unless the purchaser is young. There is already enough real-life experience and claims data to make that clear. The question is how to keep the premium level and affordable for the customer while sufficient to meet the insurer’s financial needs.

The industry’s response is ongoing and will continue to have an element of uncertainty. But some companies have handled the uncertainty far more responsibly than others. Rather than set lowball prices and overly permissive medical standards for LTC insurance, these insurers marketed the product more conservatively. As a result, their customers have never had premiums raised after the policy purchase. On the other hand, some companies that were "easy-issue" or competed most aggressively on price have had to sharply increase premiums on previously sold policies, or left the business entirely.

The insurance industry sets standards

Insurance industry standards require a cautious approach with respect to setting premiums. These standards are issued by the National Association of Insurance Commissioners (NAIC) in the form of model regulations that have also been adopted into law in many states.

The regulations require insurance companies to set adequate premiums on new policies when sold, to minimize the chance of rate hikes in years to come. They call for "moderately adverse" assumptions about the future claims experience to be used in setting rates that should remain level for the life of a policyholder.

The industry’s intent is that by factoring in adversity from the start, premiums can be set more realistically. That means less chance that a higher-than-assumed number of claims, for example, will result in a need to increase premiums later. The LTC insurance shopper can therefore be more confident that the premium he is budgeting for will remain stable and affordable.

Because premium stability is such a big consideration in the consumer’s decision to buy LTC coverage, it is important to understand some of the factors that will influence rates over the short and long haul.