Journal of Financial Planning: December 2023
Brenda Cude, Ph.D., is professor emeritus at the University of Georgia. Her primary research interests are in consumer decision-making, especially personal financial literacy. Dr. Cude has served as a funded consumer representative to the National Association of Insurance Commissioners (NAIC) since 1994. A specific area of expertise is consumer communication.
Lisa Groshong, Ph.D., leads consumer insights research for a D.C.-based agency specializing in diverse audiences and challenging topics. A background in journalism, natural resources, and the Peace Corps informs her research approach. Dr. Groshong also teaches at the University of Missouri.
Bonnie Burns is a consultant to state and national consumer groups. She is a subject matter expert on consumer issues and long-term care insurance. She has served as a funded consumer representative to the NAIC since 1992, primarily focused on consumer protection.
Richard Weber is a 57-year veteran of the life insurance industry. He has been a successful sales agent, an insurance company executive, and now is one of the few fee-only insurance experts in the United States. Dick is a funded consumer representative to the NAIC, focusing on life and long-term care insurance.
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Long-term care insurance is one strategy to manage financial uncertainties. Yet this product has itself become a financial risk for policyholders who have experienced rate increases and uncertainty about possible future rate increases. The intent of this article is to help financial professionals better understand why long-term care insurance rate increases are occurring and their clients’ options when faced with a rate increase. The focus is on traditional stand-alone long-term care insurance policies.
This article reports the results of interviews with 14 financial planners. All had experience advising clients who had received long-term care insurance rate increase notices. The research was initiated and funded by the National Association of Insurance Commissioners’ (NAIC) Center for Insurance Policy and Research.
Background
The NAIC (2019) and Neuhauser (2012) describe the policy terms of a traditional stand-alone long-term care insurance policy. Key policy terms include:
- A maximum benefit limit (commonly stated in years)
- A daily/weekly/monthly benefit limit, typically stated as a dollar amount
- Benefit triggers that determine eligibility to receive benefits. Insurers who sell tax-qualified policies use activities of daily living (ADLs) or cognitive impairment as the trigger. The standard is being unable to do two of six ADLs (bathing, continence, dressing, eating, toileting, and transferring) without human assistance for more than 90 days, or, without regard to other ADLs, the presence of cognitive impairment (i.e., Alzheimer’s or dementia)
- An elimination (or deductible) period, stated as a number of days
- An offer of inflation protection
Traditional stand-alone long-term care policies also may be tax-qualified. A tax-qualified policy offers certain federal income tax advantages, specifically deduction of part or all of the policy premium based on age if the taxpayer meets the criteria to itemize deductions. In addition, benefits received from a tax-qualified policy are not taxed.
In recent years, many policyholders with traditional stand-alone long-term care insurance policies have received one or more rate increase notices, often announcing substantial current and future increases. A report of a long-term care insurance data call to the NAIC Long-Term Care Insurance Task Force (Long Term Care Group, Inc. [LTCG] 2021) described more than 3,500 approved rate increases nationwide over the lifetime of long-term care insurance policies. The data represented about one-third of the industry. The average single requested rate increase was 78 percent, while the average single approved rate increase was 37 percent. The average cumulative approved rate increase was 112 percent. Although not addressed in the report, there are significant differences in the pricing characteristics of older and more recent policies (American Academy of Actuaries 2016) that suggest the rate increase data may be more consistent with the experience among older policies.
Explanations for the rate increases typically are associated with the limited data on which pricing assumptions for the product were based (U.S. Department of Treasury 2020). A consequence of the limited data was that when long-term care insurance companies initially set rates for traditional policies, they:
- Underestimated morbidity, or the number of policyholders who would need long-term care and for how long;
- Underestimated lapse rates, or the number of policyholders who would voluntarily drop their policies.
Rate increases also have been attributed to the recent low interest rate environment, as the low interest rates reduced the income insurers earned against their assets.1
The LTCG (2021) provided evidence that rate approval levels are inconsistent by state, suggesting that policyholders in states where higher rates are approved subsidize policyholders in other states. The report also concluded that “the cost of a nursing home does not appear to be a primary predictor of state LTC experience” (Slide 3).
Rate increase notices offer policyholders reduced benefit options to offset some or all of the announced premium increases. NAIC’s (2017) “Model Long-Term Care Insurance Regulation 641” states that at least one of the options must be either a reduction in the maximum benefit or a reduction in the daily, weekly, or monthly benefit amount.
An NAIC (2020) document described the other most common reduced benefit options as:
- Reduce inflation protection going forward while preserving accumulated inflation protection.
- Increase the elimination period.
- Choose the contingent nonforfeiture benefit, in which the future claim amount can be no more than the sum of past premiums paid minus any claims already paid.
Why Clients Bought and Kept LTCI Policies
The interviews with financial planners confirmed much of what is already known about why people bought traditional stand-alone long-term care insurance (Dorn, Sharpe, Dickey, and Herring 2007; Grote 2011). They wanted to avoid being a burden on their family, control the quality of their long-term care, and/or preserve their assets. The financial planners mentioned that experience with family members who needed long-term care often promoted interest in buying a policy.
The financial planners also reminded us that those who own traditional long-term care insurance policyholders were middle-class consumers of moderate means when they bought their policies. One financial planner said, “We had very, very modest people getting LTC. I remember the first policies we did . . . those policies were dirt cheap, typically a thousand dollars or less. And we could give them to a much broader spectrum of clients.” However, the financial planners noted that today’s purchasers of long-term care insurance have higher incomes and net worth than purchasers in previous decades. The planners often described the clients to whom they now recommend long-term care insurance as having assets between $250,000 and $1 million. The change is, in part, driven by the increase in long-term care insurance premiums over time. The NAIC has reported that between 1990 and 2015, the average annual long-term care insurance premium increased from $1,071 to $2,772 (Papp 2022).
Planners’ Perceptions of Rate Increases with Reduced Benefit Options and Clients’ Reactions
All of the financial planners we interviewed had worked with clients who had received long-term care insurance rate increase notices, usually clients who had owned their policies for more than 10 years. Financial planners cited increases of up to 500 percent. Their experience is consistent with other descriptions of rate increases (Darnell 2021).
Some financial planners thought the carriers could and should have absorbed more, if not all, of the rate increases. One said, “No one disputes rate hikes are a way of life, no matter what you’re buying, but this is way, way out of control.” Some planners thought state regulators should have done more to limit rate increases.
Some financial planners also thought the rate increase notices amplified the policyholder’s emotional reaction by creating a false sense of urgency to decide. Some considered the notices’ wording to be “enticements” to opt out of the policy and choose the contingent nonforfeiture benefit for a paid-up policy.
Many also highlighted that the notices referred to policies purchased many years earlier. Even if the policyholder initially understood the policy benefits, they likely have forgotten much of what they knew. Thus, unless the notice included at least a basic description of the policy terms, the financial planners’ clients found it difficult to put the options to reduce benefits into context. The general lack of financial and insurance literacy in the United States compounds the problem. Thinking specifically about long-term care insurance, the terms and terminology differ from those used in other insurance products, making it more difficult for the policyholder to understand their coverage. In fact, according to a 2023 survey, far more consumers think they have long-term care insurance than is probably the case, as they often confuse it with long-term disability insurance or even health insurance (Nationwide 2023).
Another observation from the financial planners was that, unlike other expenses that have gone up incrementally over time, a long-term care insurance rate increase is usually a sudden increase after many years of paying the same premium. Experience paying a “level premium” has reinforced the policyholders’ perception that their rate would not increase. As one financial planner said, “They knew that the cost of their life insurance didn’t go up and that the cost of some of their other insurance products was guaranteed not to go up.” Also, clients’ financial circumstances have probably changed in the years since their initial purchase, sometimes because they have retired and now live on a fixed income. Other policyholders may have experienced increases in their assets’ value. Thus, a rate increase notice requires the policyholder to evaluate their financial plan to pay for long-term care, especially if their financial situation has changed since they bought the policy.
Further complicating matters, it is unlikely that the policyholders are still in contact with the agent who sold them the policy, either because the book of business was sold or the agent is retired or deceased. The financial planners we interviewed had not sold the policy to the client, which limited their access to information directly from the insurance company.
The policyholders’ emotional reactions to a rate increase notice also compound the decision. Financial planners said policyholders are often confused and angry. One financial planner said of their clients, “They are just beside themselves with frustration.” Another described their clients as “despairing.”
Financial planners emphasized the importance of helping clients step back to look at the rate increases and reduced benefit options rationally. A strong emotional response often clouds judgment. One financial planner said he tries to approach such conversations with humor: “What I do is turn around that anger and say, ‘Who is the dummy?’ They made a blanket bet on people getting old and staying healthy or even taking their offer. They’re the ones that should be angry because they’re the ones that made a bad business decision.”
Planners’ Advice to Clients about Rate Increases, Reduced Benefit Options
Choosing among reduced benefit options is a complex decision. All of the financial planners said they consider the client’s personal situation when advising them about rate increases. Client characteristics that often influenced financial planners’ recommendations were the client’s age and health; their financial assets, income, and net worth; and their family medical and support history.
Since future rate increases are often predicted in the same multipage document, policyholders may not understand both the immediate and the future implications of choosing one reduced benefit option over another. For instance, a very large future rate increase stated in the text may steer policyholders toward a paid-up option. Flexibility to respond to possible future rate increases is another consideration. If a policyholder reduces a daily benefit or maximum benefit period to the bare minimum to offset a rate increase, that action likely limits or eliminates their options to respond to a future rate increase.
Overwhelmingly, the financial planners we interviewed recommended that their clients maintain their policy as is and pay the higher rate. Recall, however, that clients of financial planners are likely to have higher incomes and net worth than the average consumer.
Reasons financial planners offered for recommending that clients keep their policy as is and pay higher rates included:
- The policy was likely underpriced from the beginning. However, policyholders may not be swayed by this argument as they made their purchase decision based on whether the premium offered at the time of purchase fit their budget. It likely is not helpful to tell a policyholder that they “should” have been paying a higher premium earlier.
- If the policy has an inflation rider, the daily benefits have increased with time, and the policy is worth much more now than it was initially.
- Most policyholders have limited options to replace the policy with another policy or another approach to finance long-term care; thus, keeping their existing coverage may be their only option to use long-term care insurance to pay for care.
- The rate increase is likely small relative to the benefit, considering that some policyholders are nearing the age where a claim is more likely. However true this may be, it does not matter to a policyholder who cannot pay the higher rate or would have to reduce their standard of living to pay it.
If a policyholder must choose a reduced benefit option rather than paying a higher rate, financial planners typically recommended one of the following (depending on the policy and the client’s situation):
- Drop the inflation rider or change the method from compound to simple. Financial planners most often offered this advice if the client was older. The rationale was that clients typically had held the policy for many years, and thus their daily benefit is now generous due to annual inflation adjustments.
- Reduce the benefit period, especially if the policy’s daily benefit has increased over the life of the policy due to an inflation rider. A few financial planners described the advantage of this approach when benefits are pooled. For example, suppose one client has a $100 daily benefit for four years—that is, access to $146,000 in benefits. Another client has a $200 daily benefit for two years—also access to $146,000 in benefits. But the second client would not have to pay any of the covered costs out of pocket for the first two years on claims after the elimination period as long as the daily cost is less than $200. And if the benefits are pooled, the second client can “bank” the difference between the daily cost and the $200 benefit to functionally extend the benefit period.
Both recommendations are consistent with those of respected financial planning authorities such as Kitces (2013). Nawrocki (2012) also noted that maintaining an insurance policy, even with fewer benefits, would still give policyholders access to services that a policy might include, such as care coordination.
A few financial planners said they would consider different options if their client’s assets have decreased since they bought the policy. An example would be to tailor the policy to delay using Medicaid. Some said that if the client chose to reduce the policy’s daily benefit or its maximum benefit period, they discussed ways to supplement their long-term care insurance benefits, such as a reverse mortgage, with the client.
Implications for Financial Planners and Their Clients
A starting point for a conversation with any client-facing decisions about long-term care insurance is to remind them about the distinction between long-term care and long-term care insurance. Long-term care insurance is one of several ways to pay for long-term care. It also may be appropriate to remind the client about certain basic information, such as the likelihood of needing long-term care at their current and future ages, and the average cost of care where they live now and might plan to live in the future. The financial planners commented that recent news stories about conditions in nursing homes during the pandemic have influenced their clients, renewing their interest in alternatives to nursing homes and options that enable them to guide their own care. Thus, it may be important to remind clients of the importance of planning for home care costs, as 24/7 home care could rival the cost of institutional long-term care.
In analyzing the potential to pay for long-term care as well as insurance premiums, planners should focus on income. Older clients are more likely to rely on income from their investible assets. If income is insufficient to cover either the costs of care or the insurance premiums, then conversations about the implications of divesting assets may be necessary.
Clients with more than $5 million in investible assets may be prepared to self-finance long-term care costs. However, deciding to use assets to pay for either long-term care or long-term care insurance requires trade-offs. Some questions to ask clients to encourage analysis of the trade-offs include: If you self-finance your care, can you afford to do that at home or in a facility that is consistent with your chosen lifestyle? Is spending down your investible assets consistent with your income need and your overall financial and bequeathment goals?
Clients who face long-term care decisions may be reluctant to accept the realities of dealing with physical and cognitive limitations. Reminding them of the physical and emotional strains of long-term caregiving may be a necessary part of the conversation.
In the end, the interviews with financial planners revealed few blanket recommendations for clients whose long-term care insurance rates are increasing. Many factors, including those listed below, merge to create a complex landscape in which a decision must be made:
- The client’s health, family, and financial position
- The policy benefits
- Decisions made after any previous premium increases
- The client’s emotional response to the premium increase
Financial planners can assist long-term care insurance policyholders by helping them to rationally analyze their options, ensuring they are aware of all options and how each impacts the client’s overall financial plan.
Endnote
- See King (2016) for an excellent explanation of the basics of pricing long-term care insurance.
References
American Academy of Actuaries. 2016, June. “Understanding Premium Rate Increases on Private Long-Term Care Insurance Policyholders.” www.actuary.org/content/understanding-premium-rate-increases-private-long-term-care-insurance.
Darnell, Robert W. 2021, June. “Long-Term Care and Actuarial Equivalence.” Long-Term Care News. www.soa.org/sections/long-term-care/long-term-care-newsletter/2021/june/ltc-2021-06-darnell/.
Dorn, Mary E., Deanna L. Sharpe, Geri Dickey, and Dallisha D. Herring. 2017, November. “Understanding the Determinants of a Long-Term Care Insurance Purchase.” Journal of Financial Planning 30 (11): 38–46.
Grote, Jim. 2011, May. “Keeping Ahead of the Long-Term Care Domino.” Journal of Financial Planning 24 (5): 22–28.
King, Eric. 2016, November. “Long-Term Care Insurance Pricing Basics.” CIPR Newsletter: 11–13. https://naic.soutronglobal.net/Portal/Public/en-US/RecordView/Index/24761.
Kitces, Michael E. 2013, April. “5 Ways to Handle a Long-Term-Care Insurance Rate Increase.” Journal of Financial Planning 26 (4): 26–29. www.financialplanningassociation.org/article/journal/APR13-5-ways-handle-long-term-care-insurance-rate-increase.
Long-Term Care Group, Inc. 2021, June 25. “NAIC LTC Data Call Workstream #6 Suggested Public Presentation.” https://content.naic.org/sites/default/files/inline-files/4-Data%20Review%2020210625%20-%20Public%20Version.pdf.
National Association of Insurance Commissioners. 2017. “Model Long-Term Care Insurance Regulation 641.” https://content.naic.org/sites/default/files/inline-files/MDL-641.pdf.
National Association of Insurance Commissioners. 2019. “A Shopper’s Guide to Long-Term Care Insurance.” https://content.naic.org/sites/default/files/publication-ltc-lp-shoppers-guide-long-term.pdf.
National Association of Insurance Commissioners. 2020. “Principles for Reduced Benefit Options (RBO) Associated with Long-Term Care Insurance Rate Increases.” https://content.naic.org/cmte_ex_ltci_tf.htm.
Nationwide. 2023, July 31. “Many Americans Believe AI Will Provide Their In-Home Care as They Age.” https://news.nationwide.com/073123-many-americans-believe-ai-will-provide-in-home-care-as-they-age/.
Nawrocki, Tom. 2012, May. “Seeking Alternatives to Long-Term Care Insurance.” Journal of Financial Planning 25 (5): 20–25.
Neuhauser, Karyn L. 2012. “Long-Term Care: Helping Clients Make the Right Choice.” Journal of Financial Planning 25 (11): 44–53. www.financialplanningassociation.org/article/journal/NOV12-long-term-care-helping-clients-make-right-choices.
Papp, Justin. 2022, April 27. “Lawmakers, Regulators Seek Long-Term Care Insurance Solutions: Pressure for Government to Close Widening Gap in Coverage.” Roll Call. https://rollcall.com20022/04/27/lawmakers-regulators-seek-long-term-care-insurance-solutions/.
U.S. Department of Treasury. 2020, August. “Long-Term Care Insurance: Recommendations for Improvement of Regulation.” https://home.treasury.gov/system/files/136/Report-Federal-Interagency-Task-Force-Long-Term-Care-Insurance.pdf.