Unfortunately, many of the news stories you read do not include all the facts. These increases are primarily on those "legacy products" developed and sold under old rules and assumptions. Today's Long-Term Care Insurance is much more rate stable. The fact is the clear majority of rate increases in Long-Term Care Insurance policies have happened on policy series sold before rate stability regulation.
Pricing Based on Product Series
First, an insurance company can only justify a potential rate increase based on the performance and actuarial data from a specific "series" of products. They can't ask you to pay for the problems of products that were sold decades ago. Plus, each increase is requested and filed in each U.S. state and territory. This means a company that sold product "A" in 50 states and the District of Columbia, for example, would request an increase 51 times. It is really just one increase, however. Years later, they cannot ask you to pay more for your existing policy due to a problem with a policy series sold in 1996.
Companies Must Price to Include 'Margin for Error'
Second, today's Long-Term Care Insurance policies are different. They are sold under "new rules" that most of the states require. Under these new regulations, every insurance company that offers Long-Term Care Insurance is REQUIRED to include a margin for error. The goal is to avoid the need for any future increases in premiums in the decades to come.
Insurance regulators in each state have made changes to address premium stability so consumers can have additional peace of mind. This is important since so many people purchase Long-Term Care Insurance in their 40s and 50s before retirement.
The adoption of rate stability regulations works to help maintain premiums by making changes to how products are priced to start with and the actuarial assumptions they make when a product is approved to be sold in each state. The National Association of Insurance Commissions, NAIC, adopted this "Model Regulation" that is in force in most states. This helps keep new premiums stable for the life of the policy:
Price Based on Long-Term Premium Stability
Insurance companies now price products based on long-term premium stability. In decades past, they were priced on claim loss ratio as they do for health insurance. However, unlike health insurance, where you see frequent early claims, long-term care claims are usually many years away. While this leads to higher initial premiums compared to policies sold decades ago, those old policies were substantially underpriced. The new approach provides for a much higher degree of price stability over the life of a policy.
Unable to Price "Profit" into Potential Future Premium
Insurance companies are no longer able to price "profit" into potential future premium increases. Under the old rules, when a rate increase was requested, an insurance company could include normal profit levels into any increase. Under the new rules, an insurance company must actually decrease profit levels to a cap pre-determined by the new regulations in the law. This means two things; an insurance company will be more conservative in pricing a product to start with and, if necessary, any potential future increase would be lower.
Older Policy Errors
New products offered by an insurance company must be at least as expensive as any older plan with a rate increase. Current plans have to be at least as expensive as older plans with rate increases. This provides even more rate stable premiums as any errors made in older plans are priced into the new plans to start with. This leaves the chance of future premium increases substantially less than before.
Actuarial Certification
Perhaps the most important new regulation is Actuarial Certification: Under new rules for rate stability, the insurance company actuary must certify that no premium increases are anticipated over the life of the policy. This was not the case decades ago. If an insurance company comes back to ask for a premium increase, they must show the actuarial need and explain why the mistake was made. Insurance companies want to be very conservative in their assumptions to avoid penalties down the road.
Today's Long-Term Care Insurance is priced based on several factors that older product series did not consider. These include:
- Extreme low-interest rates.
- Low policy lapse rates.
- Margin-of-error in assumptions.
- Updated underwriting/claims data.
Hybrid/Asset Based LTC Insurance
These products combine life insurance or annuities with a qualified rider for long-term health care. They have guaranteed premiums - they can never increase ever; it is in the contract.
While typically they are paid with one single premium, many companies allow paying premiums over a period of five, ten, even twenty years - or lifetime.
No matter the actual experience with the product series, the premiums can never change.