Determining Long-Term Care Insurance Premiums

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Determining Long-Term Care Insurance Premiums

With any line of insurance, there is inevitably a large group of substandard risk applicants seeking coverage—those who are neither ideal nor completely uninsurable. Many insurers will offer them a rated policy at a higher-than-standard premium. The maximum daily benefit as well as the benefit period available in rated policies is also typically limited.

Some companies have developed a niche and specialize in the substandard or high-risk insurance market. Other companies, on the other hand, have made a business decision to shun that market. They feel it is best to limit their exposure to standard and preferred-risk policies. Presumably, this philosophy allows insurers to offer lower rates—to those who can qualify.

Shopper, know thyself

A long-term care policy shopper is wise to consider the risk category in which his or her application is likely to be placed and consult an insurance professional as to the insurance companies best suited to his or her needs. Multiple applications in a scattergun approach are not a good idea because they will probably result in being declined by one or more insurers. This fact alone will be a significant red flag to anyone who subsequently reviews the application.

Like other sellers of goods and services, insurance companies try to price their products within a range that the free market will bear. The premium must be low enough to attract a sufficient number of customers but high enough to generate the revenue required to pay expenses, maintain a reserve to pay claims, and make an adequate profit for the company.

Premiums for policies with different risk levels are determined by the insurance company actuaries. They want to find the appropriate premiums to be charged for insuring normal (or standard) risks, as well as policy applicants who are deemed low (preferred) or high (substandard or impaired) risks.

To do this, the actuaries rely on mathematical calculations on the probability and timing of a variety of future events. At least three categories of variable factors combine to influence the premium charged for insurance coverage:

Industry-wide conditions

An example is the framework of laws and regulations that all long-term care (LTC) insurers must follow. If particular coverage or policy features are mandated by law, all companies must include their costs in determining an appropriate premium. Factors like that affect insurance companies across the board, although not all insurers will need to adjust premiums to the same degree in response.

The consumer has little control over these circumstances, but should be aware of them.

Risk-specific or individual conditions

Long-term care insurance for a 65-year-old costs more than for a much younger person. A family history of Alzheimer’s will make it impossible for a person to buy LTC insurance at any price. Many cancer patients without currently active disease will have no problem finding coverage at standard rates, but arthritis can result in a higher-premium policy or no coverage at all. Smokers almost invariably pay more than non-smokers for any sort of coverage.

In each application for insurance, the insurer looks for any indication of an above-average (or below average) risk that it will have to pay a claim. This is why underwriting is so important in establishing premiums.

Issuing insurance to a given applicant at one price might make no business sense yet be a sound decision at a higher price. For those presenting extra risk, an increase from the standard premium is the added reward that might make it worthwhile for the insurer to assume this extra risk. If the risk is great enough, however, no premium will be sufficient, and the company will decline to issue a policy. Alzheimer’s disease is in this category.

Policy-specific benefits, features, and options

Coverage for a higher dollar amount, or for a longer benefit period, costs more than for lesser coverage. Likewise, a policy that provides for easier access to benefits costs more than a restrictive one.

It makes sense, for example, that with a 30-day elimination period, a policy will be more expensive than one with a 90-day waiting period, other things being equal. No surprises here; you get what you pay for.

A great many combinations are possible when making choices as to the three most important long-term care insurance variables—benefit amount, benefit period, and elimination period.

Each policy that results has a different price tag. The insurance shopper can therefore make tradeoffs or adjustments in one or more of the variables in an effort to reach a compromise between the most generous coverage and an affordable premium.