A number of you have asked me to comment on Jeff Opdyke?s rather non-helpful article in the November 14th Wall Street Journal. Non-helpful primarily because he missed an opportunity to provide meaningful information to consumers who, in fact, want and need relevant advice. It should come as no surprise that his titillating title and liberal use of adjectives in the opening paragraphs leave current policyholders steaming and scratching their heads while potential purchasers are even more confused as to the value of today?s long-term care insurance policies.
If Opdyke wanted to be helpful, he may have started by saying that yes, policies from the late 1980?s and through the mid-1990?s were, in large part, underpriced for two primary reasons. Some companies were irresponsible in their pricing practices. As with many accident and health policies certain insurance carriers will try to capture market share with low pricing and easy underwriting knowing full well that premiums will need to be increased in the foreseeable future. Agents who sold these policies thinking that premiums wouldn?t be increased should have known better. Consumers who purchase long-term care insurance based on price alone should be more prudent; this product is a financial risk management tool not a gallon of gasoline; one generally gets what they pay for. The real damaged insureds are those that bought a policy based on deceptive promises and or the high pressure tactics employed by a few insurance companies and their distribution that specialized in selling long-term care insurance with dubious pricing and underwriting practices.
In many cases, however, there are legitimate reasons why some policies are experiencing rate increases:
- People love their long-term care insurance policy which means more have kept them in-force for longer than is typical of most insurance plans. Low lapse rates (voluntary and involuntary) have created upward pressure on in-force premiums.
- Many of the policies in question were designed in an interest rate environment that is far different than it is today. Our current extended low interest rate atmosphere means that insurance companies are not earning the anticipated returns on the large reserves that long-term care insurance requires. A 25 basis point difference in this pricing component over a period of time can have dramatic impact on rate stability.
- Benefit utilization has been higher than expected. People want care at home and thus they tend to claim earlier. Expect assisted living claims to place additional upward pressure on in-force and new business pricing.
So Mr. Opdyke is only partially correct in his adjective usage. Some, not all policies were ?wildly underpriced? and the fact is that few policyholders are facing ?routine? rate increases. Beside that, after all of these years I?m not sure where anyone got the idea that long-term care insurance premiums wouldn?t or shouldn?t go up. With the exception of whole life insurance (and now universal life with secondary guarantees) I would like someone to identify an insurance product where premiums don?t increase or benefits are not changed, reduced or disappear. The fact is that even when in-force LTCi premiums are increased, insureds generally keep their policy which is a testament to their perception of value of what they have purchased..
Finally, if a policyholder owns a long-term care insurance plan from a company that has legitimate reasons for raising in-force rates, a case could be made that the insureds received a ?time value of money dividend?. First, they have enjoyed lower than market premiums for a number of years. Second, when adjusted for inflation, the premium increases they are experiencing are generally quite moderate. Therefore, they have had a pricing advantage. Again, I?m not trying to soft-peddle or downplay the negative impact of in-force premium increases, particularly for people on fixed incomes. However, there are more facets to this issue than Mr. Opdyke has presented in his brief, broad-brush treatment.
One more point of contention; Mr. Opdyke alludes to ?more affordable bare bones policies?. I would like to know which one?s he is referring to. As most of us know, premiums on new policies have been consistently going up over the past five years as insurance companies have been adjusting to the new realities and the more stringent regulatory environment of rate stabilization. Additionally, as with medical insurance, the states mandate certain benefits making ?bare bones? policies non-existent. With this in mind, the notion that someone who purchased a policy ten years ago could find one that is less expensive today, particularly taking into account that they would have to adjust the benefit package for inflation is a fantasy.
That being said, as I recommended in my Blog posting of October 26th, I do think it is a good idea to review an insured?s long-term care insurance program periodically. I?m not suggesting replacement, but I am urging that we provide our long-term care insurance clients with the same policy review regimen that we generally suggest for other lines of business.
Thanks again for asking me to comment on this article. I hope this will help you respond to your client?s and prospect?s questions.
This will be my last post prior to Thanksgiving. I hope that you and your families have a great day and a safe and relaxing holiday.