LONG-TERM-CARE insurance policies are, in my opinion, both a blessing and a curse. They’re a blessing because they can help cover critical and costly care when a family might have no other financial options.
But they can also feel like a curse. That’s because of what many owners of traditional long-term-care (LTC) insurance refer to as “the letter.” This is the renewal letter that policyholders receive each year. These letters provide a menu of renewal options, each of which offers some combination of premium increases and benefit cuts. But unlike most insurance policies, which might impose a modest or at least manageable increase each year, it isn’t uncommon to see LTC premiums jump by 10%, 20% or more—sometimes much more.
As a result, the options in these letters generally range from unpalatable to unaffordable to downright depressing, plus the decision is often complicated. These letters frequently present a matrix of choices, with options along multiple dimensions, including:
Cost
Maximum daily benefit
Inflation benefit
Elimination period
Benefit period
Total lifetime benefit
Cash payment to policyholder
Because there are so many variables, the renewal decision defies straightforward cost-benefit analysis, making it an agonizing annual dilemma for policyholders.
If you or a family member has one of these policies, how should you approach the decision? Before getting into the details, it’s important first to understand some background—in other words, why these letters are even necessary.
The fundamental problem in the LTC market isn’t difficult to grasp: When insurers created these products, they miscalculated and priced them far too low. There were three reasons for this:
Health care costs have increased much faster than expected. Over the past 20 years, health care inflation has outpaced the overall inflation rate by almost 1½ percentage points a year. Compounded over time, the result has been a steep increase in the size of claims.
Policyholders held on to policies much longer than expected. With a product like long-term-care insurance, the most profitable customer is the one who pays premiums for a period of years but then cancels before ever making a claim. LTC customers, however, didn’t cancel at nearly the expected rate. Genworth, the largest player in LTC coverage, expected a lapse rate around 5%. But the actual rate has been an order of magnitude lower—just 0.7%.
Interest rates have been much lower than expected. Since insurance companies invest a large part of the premiums they receive in bonds, this has been an increasing problem. In fact, the timing couldn’t have been worse. Interest rates have been falling since the early 1980s, which is precisely when LTC policies started to become popular. More than any other kind of coverage, this has been a problem for LTC insurers because these policies are intended to be lifetime commitments, and yet the longest-term bond is just 30 years. Insurers weren’t able to fully protect themselves by matching assets and liabilities, as they normally do. This has spurred some insurers to offer a different type of LTC insurance—known as hybrid policies—which haven’t had these pricing problems.
Indeed, traditional LTC insurance has been a disaster for insurers. Genworth alone has incurred billions in losses on its LTC business. Losses there have averaged $425 million per year in recent years. To stop the bleeding, insurers are doing everything they can to fix the pricing on these policies. That explains the frequently brutal renewal terms.
As a consumer, if you’re on the receiving end of a renewal letter, how should you approach the decision? Here are three recommendations:
Hold the line on benefits. All things being equal, a cut to benefits is more profitable to an insurer than an increase in premiums. That’s because claims can come in at any time, while premium increases are received only incrementally over time. Result: An insurer would much rather you accepted a reduction in benefits. As a consumer, then, this should be the last thing you do. If you can afford it, pay to retain your policy’s current maximum daily benefit.
Take it one year at a time. Many renewal letters will include language along the lines of: “Please be aware that over the next X years, we intend to seek additional rate increases…” and they’ll often include a staggeringly high number. The operative words here are “intend to seek.” The reality is that rate increases must be approved by each state’s commissioner of insurance—and they don’t approve every increase that’s requested. The job of insurance regulators is to achieve a delicate balance: They want to protect consumers from rising rates. But if they squeeze insurers too much, they’ll become insolvent. The rate increases that your insurer seeks may not fully materialize, so don’t let the prospect of future increases scare you into dropping your policy. Instead, take it year by year.
Read between the lines. Some letters will offer buyouts—literally paying a policyholder to cancel coverage or reduce benefits to a level that’s akin to canceling. I once saw a renewal letter that proposed cutting the total lifetime benefit of a policy to less than $5,000 in exchange for an upfront payment to the policyholder. It was an absurd option, but it was also very telling. If your insurance company’s actuaries are so eager to have you cancel, that likely means you’re getting the better end of the deal. The logical conclusion: In cases like this, you’re better off not accepting a buyout. If you can afford to keep up with the premiums, stick with it.
The key thing to understand here is that insurance companies have, in effect, been providing subsidies for years to LTC policyholders. And the fact that insurers are still taking losses on these policies tells you that these subsidies haven’t fully gone away. That’s thanks to regulators, who have been keeping a lid on price increases. If you’re a policyholder on the receiving end of a renewal letter, the increases probably seem jarring—and they are. But as aggravating as these increases are, the fact that insurers are still taking losses tells you that, as a policyholder, you’re still getting the better end of the bargain.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossmanand check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Just before turning 51 in 2001 I purchased a LTCI policy now at MetLife, originally from TIAA. The type of pricing described in the article and comments was offered, but I didn’t want the uncertainty of future premium increases. I chose the simpler alternative, a considerably more expensive but fixed annual premium for 5-year coverage with 5% compound annual increase in daily and lifetime maximum benefits. No annual renewal letter, just the same premium year after year.
I knew that the nominal sum of 20 years’ fixed premiums before retiring in 2021 would be more than offset by my CCRC’s discount on the entry fee for having this LTCI coverage. With inflation in the years since, the fixed annual premium has felt less and less burdensome. As for claims, I haven’t needed the coverage (yet); how much hassle our CCRC’s insurance coordinator will encounter in getting authorization remains to be seen.
My wife and I have an LTC policy through Genworth. We both worked in insurance for 40+ years. We understand why the increases are taking place (we don’t like them any better than anyone else). I carefully analyze the infamous premium increase letter and usually opt to keep our current coverage limits and pay the increased premium. Regulators are in a tight spot too. They have to allow some increases so the company doesn’t go bankrupt but that has to be balanced with their obligation to protect policyholders. This little snippet caught my eye: Genworth Financial reports 2019 executive compensation In 2019, six executives at Genworth Financial received on average a compensation package of $5.3M, a 58% increase compared to previous year. Thomas J. McInerney, Chief Executive Officer, received $9.1M in total, which decreased by 2% compared to 2018.
Apparently there is good money in running a company that’s not very profitable.
Adam, what a timely article. I just received “the letter” from Genworth for my wife’s and my policies. Your article helped clarify my decision-making on their latest rate increase.
So, I once had LTC insurance, but stopped when the price got too high. However, given Medicaid, isn’t LTC as much a form of “legacy” insurance – for leaving assets to your survivors?
But, more importantly, I am wondering if any of the LTC experts here can refer me to individuals with expertise in tax-favored funding solutions, as well as LTC as a voluntary benefit.
Seems to me that most of the tax preferred LTC options are underutilized; and/or unknown – especially with respect to the options possible through employer benefit plans and/or arrangements.
This is a good article. I have worked in the insurance business for many years and the story summarizes many of the challenges I have heard faced by insurers. My wife and I purchased group LTC policies through my employer approximately 12 years ago we had our first increase last year at approximately 80%. It’s important after receiving an increase and having a policy for a period of time to request an inflated benefit schedule which summarizes today’s current benefits after the inflation indexing taking place over the years (assuming a policy has inflation indexing). I was surprised how much our benefit had increased and we made the decision to eat the increase while I am still working. In the future we may decide to drop future inflation compounding to hold the future costs down but will not lose what benefit we accrued to date. I agree that even with the high increases many people still have coverage they couldn’t obtain in today’s market and provisions unmatched by the newer generation of policies.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
Just before turning 51 in 2001 I purchased a LTCI policy now at MetLife, originally from TIAA. The type of pricing described in the article and comments was offered, but I didn’t want the uncertainty of future premium increases. I chose the simpler alternative, a considerably more expensive but fixed annual premium for 5-year coverage with 5% compound annual increase in daily and lifetime maximum benefits. No annual renewal letter, just the same premium year after year.
I knew that the nominal sum of 20 years’ fixed premiums before retiring in 2021 would be more than offset by my CCRC’s discount on the entry fee for having this LTCI coverage. With inflation in the years since, the fixed annual premium has felt less and less burdensome. As for claims, I haven’t needed the coverage (yet); how much hassle our CCRC’s insurance coordinator will encounter in getting authorization remains to be seen.
very timely as I just received “the letter” from MetLife.
40% increase spread over three years.
they offered: reduce inflation protection, reduce benefit amount, reduce benefit term.
is there a reason that these rate increases are occurring now, and across insurers? I have had my LTC policy for at least ten years now.
My wife and I have an LTC policy through Genworth. We both worked in insurance for 40+ years. We understand why the increases are taking place (we don’t like them any better than anyone else). I carefully analyze the infamous premium increase letter and usually opt to keep our current coverage limits and pay the increased premium. Regulators are in a tight spot too. They have to allow some increases so the company doesn’t go bankrupt but that has to be balanced with their obligation to protect policyholders. This little snippet caught my eye: Genworth Financial reports 2019 executive compensation In 2019, six executives at Genworth Financial received on average a compensation package of $5.3M, a 58% increase compared to previous year. Thomas J. McInerney, Chief Executive Officer, received $9.1M in total, which decreased by 2% compared to 2018.
Apparently there is good money in running a company that’s not very profitable.
Adam, what a timely article. I just received “the letter” from Genworth for my wife’s and my policies. Your article helped clarify my decision-making on their latest rate increase.
So, I once had LTC insurance, but stopped when the price got too high. However, given Medicaid, isn’t LTC as much a form of “legacy” insurance – for leaving assets to your survivors?
But, more importantly, I am wondering if any of the LTC experts here can refer me to individuals with expertise in tax-favored funding solutions, as well as LTC as a voluntary benefit.
Seems to me that most of the tax preferred LTC options are underutilized; and/or unknown – especially with respect to the options possible through employer benefit plans and/or arrangements.
This is a good article. I have worked in the insurance business for many years and the story summarizes many of the challenges I have heard faced by insurers. My wife and I purchased group LTC policies through my employer approximately 12 years ago we had our first increase last year at approximately 80%. It’s important after receiving an increase and having a policy for a period of time to request an inflated benefit schedule which summarizes today’s current benefits after the inflation indexing taking place over the years (assuming a policy has inflation indexing). I was surprised how much our benefit had increased and we made the decision to eat the increase while I am still working. In the future we may decide to drop future inflation compounding to hold the future costs down but will not lose what benefit we accrued to date. I agree that even with the high increases many people still have coverage they couldn’t obtain in today’s market and provisions unmatched by the newer generation of policies.
This article is poorly researched and filled with misleading statements.