Rate Increases! Rate Increases! Rate Increases!

The biggest misunderstandings about long-term care insurance today concern rate increases and the Rate Stability Regulation.

Excerpt from my new book, "Long-Term Care Insurance NOW!"

Here are some facts about long-term care insurance rate increases:

 Your premium canNOT be raised because you get older.

 Your premium canNOT be raised because you reach a certain age.

 Your premium canNOT be raised because your health worsens.

 Your premium canNOT be raised because you move to another state.

 Your premium canNOT be raised because you make a claim.

 Your premium canNOT be raised just to increase the insurance company’s profits.

 You canNOT be singled out for a premium increase. Everyone in your state who owns that same type of policy must share any premium increase.

 Any premium increase must be based on current and projected claims for your specific policy type.

 In nearly every state, any premium increase must be reviewed and approved by the insurance regulators in that state.

This is all good news. But you are probably thinking, “Why have so many long-term care insurance policies had rate increases?” That is a good question. The answer: the actuaries were wrong.

I explain why on my website. Go to www.LTCShop.com and click on “Rate Increases” in the menu.

The actuaries' big mistake was that they did not realize how much people would love long-term care insurance. The actuaries expected about 5% of policyholders to cancel their policies each year. In reality, less than 1% of policyholders cancel their policies each year. Most people who purchase long-term care insurance hold onto it for life. This caught the actuaries by surprise. Claims ended up being twice as high as the actuaries had projected. And that’s why many policies purchased in the late 90s and early 2000s have had rate increases totaling 80% and even higher.

The most important question right now is:

“If I buy a long-term care insurance policy today, will I have big premium increases like the older policies had?”

The answer: No.

Keep reading, and I will explain why.

First, here is the bad news:

Any long-term care insurance policy purchased today in your state is the most expensive long-term care insurance policy ever sold by that company in your state.

Second, here is the good news:

Any long-term care insurance policy purchased today in your state is the most expensive long-term care insurance policy ever sold by that company in your state.

Go ahead.

Read it again.

There is no typo.

The bad news is the good news.

The good news is the bad news.

The old (cheaper) policies had big rate increases.

The new (more expensive) policies already include all those rate increases in today’s pricing. That is why the new policies cost so much more than the older policies.

Insurance regulators do NOT allow any policy purchased today to use the old pricing assumptions. All policies purchased today must use the most current claims data and the most accurate pricing assumptions available to date.

Any policy purchased today must already include all the prior rate increases.

That means every policy purchased today is much more expensive than LTCi policies sold 20+ years ago.

For example, if the older policy sold by the insurance company cost $2,000 per year for “Z” benefits and that policy had an 80% rate increase, a new policy with “Z” benefits must be priced at $3,600 per year or more.

Here is how that is calculated:

$2,000 (older policy pricing)

plus 80% (older policy rate increase)

= $3,600 (new policy pricing)

(To all my actuary friends, this equation oversimplifies how new pricing works, but I am just trying to help consumers understand a complex calculation.)

As a consumer, you may think: “So what, Scott? So what if today’s policies include all the prior rate increases? If I buy a policy today, is the premium guaranteed to remain the same for life?”

No. If you buy a policy today, you could still have a rate increase if the insurance company’s claims on the new policies are much higher than they have projected.

However, 41 states have enacted strict pricing regulations to help curb rate increases. It is called the “Rate Stability Regulation.” This regulation helps protect consumers who buy long-term care insurance today.

If your state has passed the "Rate Stability Regulation," these new rules ONLY apply to policies purchased after the Rate Stability Regulation became effective in your state.

UNDER THE OLD RULES

When a rate increase was requested, the insurance company could price normal profit levels into the rate increase. In many cases, a rate increase resulted in increased profits for the insurance company.

UNDER THE NEW RULES

If an insurance company requests a rate increase, it must decrease the profit levels to a cap predetermined by the regulation. Even the rate increase cannot include normal profits, just a small amount to cover administrative costs. Essentially, this regulation removed the profit incentive from rate increases.

UNDER THE OLD RULES

The initial pricing capped profits, but more profit could be made when a rate increase was requested.

UNDER THE NEW RULES

Higher profits are allowed in the initial pricing, but the higher profits can ONLY be kept IF THEY KEEP PREMIUMS LEVEL.

UNDER THE OLD RULES

The insurance companies were NOT allowed to include any “margin for error” in their initial pricing. There was no cushion in the policy if the claims exceeded the original projections.

UNDER THE NEW RULES

Every insurance company is REQUIRED to include a “cushion” in their pricing, which is a margin for error. The goal of the “cushion” is to try to avoid the need for any future premium increases.

UNDER THE OLD RULES

The insurance companies did NOT have to certify the accuracy of their pricing assumptions. If their assumptions turned out to be wrong, they would request a rate increase.

UNDER THE NEW RULES

Insurance companies are required to have a qualified actuary who certifies that no premium increases are anticipated over the life of the policy. This is why they are required to include a “margin for error” in their pricing.

Please note that the new rules ONLY apply to policies purchased after the Rate Stability Regulation became effective in your state.

Going back to the earlier example, if the older policy sold by the insurance company cost $2,000 per year for “Z” benefits, and that policy had an 80% rate increase, a new policy, under the Rate Stability Regulation, with “Z” benefits must be priced around $4,032 per year or even more.

Here is how that is calculated:

$2,000 (older policy pricing)

plus 80% (older policy rate increase)

plus ~12% (pricing cushion/margin for error)

= $4,032 (new policy pricing)

That is why I wrote earlier, “Any long-term care insurance policy purchased today, in your state, is the most expensive long-term care insurance policy ever sold by that company in your state.”

That’s bad news, but it’s also good news.

When was the Rate Stability Regulation enacted?

The National Association of Insurance Commissioners (NAIC) created the “model” for the Rate Stability Regulation in December 2000, but it did not become effective in any states at that time. Before the regulation took effect, each state had to pass the regulation. Idaho was the first state to pass the Rate Stability Regulation. The regulation took effect in Idaho on July 1st, 2001. Oklahoma was next to pass the regulation on November 1st, 2001. Seven more states passed the regulation in 2002, nine more in 2003, five more in 2004, three more in 2005, five more in 2006, two in 2007, three in 2008, three in 2009, two in 2010, and finally, New Hampshire was the last state to pass the regulation. It became effective in New Hampshire on June 25th, 2012.

Is the Rate Stability Regulation effective in my state?

Go to LTCshop.com and click on “Rate Increases” in the menu. It will take you to a map showing which states have passed the regulation and which have not.

Is the policy I purchased covered under the Rate Stability Regulation?

Go to LTCShop.com and click on “Rate Increases” in the menu. Click on the state where you were a resident when you purchased your policy. After clicking on the state, you will see the date the Rate Stability Regulation became effective in that state. If your policy was purchased before that date, it probably is NOT protected by the Rate Stability Regulation. If your policy was purchased after that date, it probably is protected by the Rate Stability Regulation.

What if I buy a policy in a state with the Rate Stability Regulation, but then I move to a state that does not have the Rate Stability Regulation?

That is OK. You are still protected. Whether or not the Rate Stability Regulation protects your policy is determined by the state you resided in when you purchased your policy, not the state you may move to.

Are some LTCi policies NOT covered by the Rate Stability Regulation?

Yes. Many group policies (e.g., the Federal Long-Term Care Insurance Program, CalPERS, and other self-funded groups) are not required to comply with the Rate Stability Regulation.

Is the Rate Stability Regulation working?

Yes, it is.

Why is the Rate Stability Regulation working?

It works because it uses the old-fashioned carrot-and-stick method to get things done.

The regulation rewards the insurance company with higher profits if they keep premiums level. (That’s the carrot.)

The regulation punishes the insurance company by forcing them to lower their profits if they request a rate increase. (That’s the stick.)

How effective is the Rate Stability Regulation? Aren’t policyholders still getting rate increases?

Many of the rate increases that you hear about are rate increases on policies that are NOT under the Rate Stability Regulation. To determine how well the Rate Stability Regulation works, you must look at the rate increase history of policies sold AFTER the Rate Stability Regulation took effect in your state. Newer policies have had either no rate increases, smaller rate increases, and/or fewer rate increases.

When you apply for a traditional long-term care insurance policy in most states, you must complete a “Personal Worksheet.” The “Personal Worksheet” shows the history of the rate increase of the insurance company in the past 10 years (or longer). When you look over the list, you’ll see that newer policies have had either no rate increases or smaller rate increases than older policies. That’s because the newer a policy is, the more conservatively priced it is.