Interest rates are up, and many insurance carriers are reaping the benefits. Most invest a substantial portion of premiums in fixed-income securities until the money is needed to pay claims, and that’s good when rates are going higher.
Latus cites the aging population, the rapidly growing number of people entering their retirement years and the rising costs of care. Indeed, there are few alternatives to LTC insurance—privately paid coverage for at-home or nursing-home care for those unable to perform certain standard activities of daily living. Regular health insurance and Medicare may provide temporary rehabilitation assistance after somebody suffers a severe injury or illness, but they don’t provide extended custodial aid. Medicaid might, but you have to be impoverished to qualify for it.
But long-term-care insurance has its own disadvantages. For many people, it has become too costly. “Several of my clients have experienced increases in their long-term-care premiums in recent years, some as high as 30% or greater,” says B. Kelly Keydel, a managing director at Wealthspire Advisors in Seattle. “Along with increases in premiums, reduced benefits have also been offered as a way for clients to maintain affordable premium payments.”
In some cases, she adds, this combination “made the policy not worth keeping.”
Thomas West, a senior partner at Signature Estate & Investment Advisors in Tysons Corner, Va., is not optimistic that current conditions will help much. “Higher interest rates can hypothetically improve the overall stability of the LTC insurance market,” he says, “[but] I’m not convinced that the risks to insurance carriers are actually lower.”
Tightening Underwriting Standards
Some LTC insurance providers have also raised their acceptance threshold for new policies, disqualifying anyone judged too unhealthy as a bad risk. Those strictures, however, may be easing.
“We’ve seen a couple [of] carriers loosen the restrictions if an applicant’s family member had dementia or memory loss, [and] one carrier that also increased what a person’s A1C can be if the rest of the health and build were within the guidelines,” says Brian Gordon, president of Gordon Associates Long Term Care Planning in Bannockburn, Ill. (A person’s “A1C” is a measure of average blood sugar and is a standard diabetes metric.)
Rising premiums and tightening underwriting standards “were largely generated by the carriers’ [incorrect] predictions,” says Aaron Schindler, president of Care Concierge NY in New York City. “Low interest rates were not the cause.”
A Troubled History
To be sure, the long-term-care insurance industry has a troubled history. In the 1970s, when LTC policies first became widely available, there were as many as 100 carriers. Today there are only about a dozen providers of traditional coverage. One by one, they exited the business as their liabilities grew—and as customers lived longer and healthcare expenses grew faster than expected. “The industry is in a continual state of trying to catch up to previous pricing missteps,” says Tom Beauregard, founder and CEO of HCG Secure in Goshen, Conn.
These pricing missteps are largely attributed to insufficient actuarial data in those early years of the industry. Policyholders kept their policies instead of canceling or letting them lapse, explains Todd Wolfe, a senior insurance associate at Telemus Capital in Southfield, Mich. They also used them to file expensive claims more than was anticipated, he says.
The shadow cast by these problems still lingers. “The LTC insurance market continues to struggle,” says F. Michael Zovistoski, a managing director at UHY Advisors NY in Albany, N.Y. “We are seeing fewer new policies being written.”
The Best News In Years
Yet other experts see a potential bright side to the highest interest rates in more than a decade.
Carriers are likely to “prop up their margins and perhaps profitability,” says Len Hayduchok, president of Dedicated Financial Services in Rehoboth Beach, Del.
The low interest-rate environment, he says, had until now been working against the investment results in carriers’ portfolios, and that “reduces the reserve available for claims and profitability.”
Stronger investment revenue—and profits—should mean “lessening pressure for additional rate action on existing policies and stabilizing premiums for new policies,” says Robert Bain of the advanced planning strategy team at Edelman Financial Engines in Fairfax, Va.
Overall, this is “incredibly good news for traditional long-term-care insurers—perhaps the best news in years,” says Jesse Slome, director of the American Association for Long-Term Care Insurance, an industry group in Westlake Village, Calif.
The benefit won’t be felt immediately, he says, but it should be “of significant value” in the long run. Carriers will be “in better financial condition to pay future claims,” says Slome, and should have less reason to raise rates.
“In fact, if interest rates remain at the current levels, I predict you might even see some rate adjustments on new policy pricing for certain features,” he says. “This won’t happen overnight but could take place in 2024.”
In the world of LTC insurance, there are two broad types. Stand-alone policies are the traditional ones. But so-called hybrid policies, which are linked to life insurance or annuities, could be among the first to reap the advantages of higher interest rates.
These plans guarantee a payout, whether as a long-term-care benefit or a life insurance or annuity distribution, and generally have less stringent underwriting standards than traditional LTC plans. They “eclipsed the sales volume of traditional policies a few years ago, and that trend continues today,” says Kevin Patrick Peters, a wealth advisor at XML Financial Group in Bethesda, Md.
Hybrids also tend to be more expensive than traditional plans—but for some of them, the premiums are already coming down, says Peters, “some as much as 25%.” The premiums, he adds, are guaranteed not to increase, “and there is often just enough life insurance built into the product to recuperate the premium if benefits are never used for LTC, satisfying the ‘use it or lose it’ concern.”
Still, the repricing of new long-term-care plans has not translated into an across-the-board increase in benefits, says Michael Dugal, a financial planner at the Sentinel Group in Boston. He adds that has led “to some fairly significant disparity between different carriers.”
So it pays to shop around, not least because long-term care is too expensive to bear without insurance—a fact that isn’t lost on the nation’s leaders. In 2019, Washington state became the first to pass a comprehensive, public LTC benefit, funded through a payroll tax. It’s due to start in July 2026, and other states have similar plans in the works.
“All states will have to confront this,” says Shane Johnson, a senior partner at Perspective Financial Group, an Alera Group company, in Berwyn, Pa. “The question is how and where does it fall in their order of priorities.”
Originally published, FINANCIAL ADVISORS.com | JUNE 1, 2023