Will Long-Term Care Insurance Premiums Increase?

Millions of Americans retire each year. Many of these individuals spend decades creating budgets and planning for retirement. As retirement approaches, the last thing anyone wants or needs is an unexpected price increase on their Long-Term Care Insurance policy. 

We saw firsthand how rising premiums on older policies affected policyholders and their families. The good news is we've seen a drastic change in LTC Insurance in the last few years. These changes have reduced the risk of premium increases on policies sold today. 

Today's Long-Term Care Insurance premiums are intended to remain stable. Recent regulations, like rate stabilization rules, make premium increases unlikely. 

This article will break down Long-Term Care Insurance premiums. We'll discuss why premiums increase and why today's policies may be safer than in the past. 

Will Long-Term Care Insurance Premiums Increase?

Today's Long-Term Care Insurance policies aren't likely to experience premium increases. You may be wondering why that is. Well, it has a lot to do with relatively recent regulations. 

All companies follow the same rules when determining premium prices. Since these regulations began, most Long-Term Care Insurance premiums have remained stable. 

In fact, the Society of Actuaries (SOA) says the chance of Long-Term Care Insurance premiums increasing is less than 10%. If there is a need to increase, the SOA says the increase would likely be 10% or less.

This article will discuss several factors that affect premium prices and increases. We'll start by explaining why premiums increased in the past, before current regulations. 

Why Did Long-Term Care Insurance Rates Increase In The Past?

There are many reasons Long-Term Care Insurance rates increased in the past. Most of it boils down to inadequate planning and external factors like low-interest rates. 

Let’s also set one thing straight—not every Long-Term Care Insurance company’s rates increased in the past. Each company designed its policies, pricing, and underwriting differently. Because of these differences, some companies had more increases than others. 

Most rate increases happened in the mid-2000s on products sold years or decades prior. Since then, there has been a change in the way premiums are initially priced. These changes were intended to ensure premium stability. 

But why exactly did rates rise in the past? The main issues were:

• Lapse rates
• Interest rates & reserve funds
• Lenient underwriting & pricing

We’ll break down each of these in the sections below.

Lapse Rates

Lapse rates are the percentage of policyholders who drop or cancel a policy within a given timeframe. 

According to the American Association for Long-Term Care Insurance, insurance companies in the 80s and 90s predicted around 4% would lapse each year. The actual lapse rate turned out to be only 1% of policyholders. 

To visualize this, let's say a company has 100,000 policyholders. The company expects 4%—or 4,000—of those policyholders to cancel their policies each year. This means after 10 years, 40,000 policyholders would have lapsed. Leaving only 60,000 left for the insurance company to cover. 

In reality, only 1%—or 1,000 policyholders—canceled their policies each year. This meant that after 10 years, only 10,000 policyholders lapsed. 90,000 policyholders still needed coverage. 

Since companies didn't anticipate the low-lapse rates, they didn't see as much risk in insuring large amounts of people. Many companies didn't price for low-lapse rates either. As a result, companies faced far more claims than they ever planned on handling.

Today, Long-Term Care Insurance companies plan for low lapse rates. Today's premium prices reflect that planning. 

Interest Rates & Reserve Funds

The past few decades have seen a historical interest rate crash. Never before in history have interest rates been this low for this long.

When Long-Term Care Insurance began in the 1980s, the economy was very different. There was no way experts could have planned for or predicted today's low-interest rates. But why are interest rates so important?

Many companies keep much of their reserves in U.S. long-term bonds and other similar investments. Reserves are the minimum amount of cash and marketable securities that companies must hold. 

Money in U.S. long-term bonds gains interest over time, allowing companies easy access to their money. This is how companies pay claims and manage their money.

In 1981, these bonds were gaining 14.25% interest. In 1995, they gained 7.78% interest. And in 2020, they only gained 0.73%. 

As a result, Long-Term Care Insurance companies earned substantially less than anticipated on their reserve money. This shortfall contributed to rising premiums. Actuaries and other financial experts never anticipated that interest rates would crash. They especially didn't think rates would remain this low for a long time. 

Today, regulations require companies to price premiums with low-interest rates in mind and maintain larger reserves. These reserves must include enough money to cover companies in an emergency. 

Lenient Underwriting & Underpriced Policies

Long-Term Care Insurance underwriting was much more lenient in the past. Companies covered some people who likely wouldn't be able to get coverage today. Before we explain why companies were more lenient, you may be wondering, what is underwriting?

Underwriting is a process that determines how much risk an applicant poses to the company. This is based on health and varies by person. The poorer your health, the higher your premium. 

How Was Underwriting Different In The Past?

Underwriting guidelines were much more relaxed before recent regulations. Since Long-Term Care Insurance was so new, there wasn't much data on the health conditions associated with long-term health care. 

There were far more people who needed care and coverage than anticipated. The lack of data also made it easier for those with pre-existing conditions to get policies. People paid less for coverage a few decades ago. Since premiums were so much lower, many people bought large or unlimited benefit policies. 

Eventually, these people filed large claims without concerns about exhausting their benefits. Claims like these lasted a long time and had a considerable financial impact on companies, sometimes into the millions.

What Is Underwriting Like Today?

Today, underwriting guidelines are stricter. Guidelines can include pages of uninsurable conditions and health combinations. Many have added harsher rules for those with a history of alcohol and smoking. But the biggest change has been a stability period requirement for certain conditions. 

Insurance companies also have a better idea of what to expect when they insure those with certain conditions. This allows them to price their policies in a stable way while maintaining comprehensive coverage. 

What Are Long-Term Care Insurance Premiums Like Today?

Today, insurance companies account for the factors that caused issues in the past. This includes planning for low-interest and lapse rates. Experts have also redesigned the pricing process and underwriting guidelines. 

Under these regulations, if an insurance company requests an increase, they must actuarially prove a substantial need to increase prices. This means insurancecompanies must price their policies to remain stable throughout the policy's lifetime. They cannot use profit as a reason for increase. 

But what exactly does all of that mean? How do we know that policies are priced to remain stable? 

How Are Long-Term Care Insurance Premiums Priced Today?

Companies have to do a lot of planning when they price their products. They must, by law, plan for their premiums to be stable for the entire duration of the policy series.

Each state insurance department must approve all products and premiums before policies can be sold. Premiums must be actuarially certified to get approval from the state. Actuarial certification means actuaries deem a price appropriate to cover the company's expenses. This ensures companies complete the proper planning requirements. 

Why Would Long-Term Care Insurance Premiums Increase Today?

If policies are so meticulously priced, then why would they ever increase? Well, all of this planning is intended to make increases rare and unlikely. 

There are a few reasons a company would need to increase premiums. Premium increases have a lot to do with moderately adverse experiences (MAE) and lifetime loss ratios. 

Moderately adverse experiences may negatively affect a company's ability to cover its expenses. Every company has a defined margin of MAE. 

Lifetime loss ratios are how much companies pay out in claims compared to how much they collect through premiums. For example, if a company collects $200 in premiums and pays out $100 in claims, its loss ratio is 50%. 

Premiums can increase when companies have past and projected experiences that exceed the MAE margin. The past experience must have a loss ratio of over 58%, and the projected experience must have a loss ratio of over 85%. 

In other words, insurance companies can request an increase if they're not making enough money to cover claims. These rules make increases for today's products less likely. 

How Do Companies Increase Premiums?

But what if an insurance company does get approved for an increase? What does this process look like?

Like initial pricing, insurancecompanies must get approval from the state and third-party actuaries before raising premiums. They cannot raise premiums without going through this process. 

If an increase is approved, insurance companies cannot raise your premium higher than their other existing policies’ premiums. 

For example, let's say you bought a policy 10 years ago for $100 a month. Today, the same company offers the same policy to new customers at $120 a month. If this company wants to raise your premium, it cannot raise it by more than $20. 

It's also important to note that insurance companies can't increase premiums on an individual basis. They can't raise your premium based on a change to your health, age, or personal situation. 

Which Policies Are At Risk Of Increasing?

Older policies bought before regulations may still be at risk for increases. These may be at risk because they were priced and underwritten with less conservative assumptions. However, insurance companies must follow similar regulations regardless of the policy's age. 

This means insurance companies need approval from state insurance departments to raise premiums, even if your policy was bought before regulations. If you did buy a policy before regulations, there are a few ways you can defend against increases. We'll discuss these in the next section.

How Do You Address A Long-Term Care Insurance Premium Increase?

Today's policies are intended to have stable premiums for the lifetime of the policy. Very few companies have been approved for increases since implementing these rules. 

Older policies may still be at risk of premium increases. This is due to the lenient underwriting and policy pricing at that time. Some of these older policies were underpriced, to begin with. 

But what can you do if your premium does increase? Well, there are a few options. Some are better than others. 

• Review and rebalance your benefits
• Pay the higher premium
• Apply for a new policy

Change The Benefits Within Your Policy

If your company wants to raise your premium, they must mail you a letter explaining the increase. In this letter, the insurance company should give you the option to reduce your benefits to keep your premium the same. 

You can follow your company's recommendations or rebalance the benefits on your own. There are several ways to do this.

One of the best options is to reduce your monthly or daily benefit limit. Most experts recommend looking at how much you spend on in-home care or assisted living facilities instead of nursing homes. Most long-term health care is delivered in these settings, not nursing homes. 

Accept The Increased Premium Price

Sometimes, it may be best to accept the new premium price. As we age, the likelihood of needing care increases. The last thing any of us want to do is reduce our benefits right before we need them. 

This is especially true for those who already need consistent long-term health care. With most policies, you stop paying the premium once you receive benefits. That means your higher premium may not impact you for a while. 

Most people also have inflation riders on their policies. These increase the benefits within your policy even when you're receiving benefits. In these cases, it may be best to pay a little more for coverage rather than reduce it. 

Apply For A New Policy

Applying for a new policy usually isn't a good idea. In almost every case, you will pay more for a new policy than you would with a premium increase on your old policy. This is because you will have aged and may have experienced changes to your health. These can both affect the price of a new policy.

However, a new policy may be an option if you're relatively young and in good health. Especially if you have reason to believe the insurance company will continue to raise premiums. 

Newer policies are more rate-stable and less likely to increase. Some policies, like hybrid policies, can never increase. Consider meeting with a Long-Term Care Insurance specialist for advice on choosing coverage. 

Should You Worry About Your Long-Term Care Insurance Premium Increasing?

Long-Term Care Insurance policies bought today are much less likely to experience premium increases. This is because of underwriting, pricing, and regulations changes in recent years.

These new rules help regulate premium prices when insurance companies file their premium prices and products with state insurance departments. And because insurance companies go through more scrutiny, increases are less likely to get approved. 

Today, Long-Term Care Insurance policies are designed to have stable premiums for the policy's lifetime. To learn more about other factors that affect Long-Term Care Insurance premiums, read our article on the costs of Long-Term Care Insurance.