LTC insurance premium "surprise"

[Independent]

Quote:

Originally Posted by samclem Here's a link to a previous post on buying-as-you-go ("Future Purchase Option") vs. the level premium option for LTC. In the federal program (a group plan) for a simple example I looked at, monthly premiums go up 1000% between ages 65 and 85: At 65 years old the person paid $140 per month, by age 85 the person would have to pay $1500 per month for this policy ($150/day benefit, 5 years payout). Maybe some people consider this "affordable," it just didn't seem affordable to me. At 5% inflation growth per year, the 65 year old's $140 premium should have gone up to $341 by the time he was 85. The $1160 additional amount beyond that represents the increased cost of buying additional insurance as one becomes older. For comparison, if purchased at age 45, his level premium ("Automatic Inflation Compounding Option") would have stayed at $80 per month. The FPO premium exceeds the level premium staring at age 62 and the level premium option looks like quite a bargain at later years, compared to buy-more-as-you-go" ("Future Purchase Option"). .

Sam, did you try a calculation that assumed you invested the difference in a side fund, then used that fund to cover the old age premiums? That's what the insurance company does with the excess of the $80 over the $50, and they make it work.

If I were starting this at 40, I'd have traditional investments for the next 20 years, but at some point I might move to a SPIA to get a little more cash.

There are a lot of variables, one is whether or not you stay with this particular insurer. The increasing premium version gives you more options, if you decide to change carriers you at least take your side fund with you. If you die your spouse gets the side fund. The insurer can give you an pretty good equivalent interest rate on the level premium option because it assumes a certain percent of the policyowners will die or voluntarily drop out along the way and they can transfer the assets backing those policies to the people who stay with the program.

I'm not saying it's always better to do the increasing premium, but I take chicano's "no free lunch" comment and try to see this through the insurer's eyes. That may highlight the important uncertainties for me to consider.

[samclem]

Quote:

Originally Posted by Independent Sam, did you try a calculation that assumed you invested the difference in a side fund, then used that fund to cover the old age premiums?

Yes, I did this calculation at the time. I don't recall the specifics, but the required rate of return on the side fund was very high, and totally unobtainable given the level of risk one would want to take for a fund with this purpose.

Quote:

Originally Posted by Independent That's what the insurance company does with the excess of the $80 over the $50, and they make it work.

Well, not quite. Since I wrote the initial post, the insurance company significantly increased their rates on policies with the included inflation protection, so even the "big boys" weren't able to make it work. This was because their investments weren't producing the expected returns, not because the cost of care had gone up (they pay out a set daily dollar rate, so the LTC insurers are largely insulated from rising care costs, that risk is left to the policyholder). In addition, insurers have some advantages that we'd lack-they get the benefit of all the policies that lapse or are abandoned early, and each policy doesn't need to cover that specific patient's costs (as long as all the policies written, in aggregate, cover all costs, in aggregate).

As I said, I think these FPO policies may make some sense as part of a complete package. It's "cheap" coverage against a very early need for LTC, and one can still retain the flat benefit (without buying additional coverage to keep up with inflation) at moderate cost if additional insurance is declined starting at about age 65-70. But this requires a good understanding of the risks one is taking, especially with regard to inflation.

[mask]

Whether the premiums for your LTC policy has increased so far or not, it is bound to increase multiple times in the near future (during the next 2 to 20 years).

Here is why I say so. When LTC insurance product was being designed and priced by the Actuaries, they had assumed some of the ratios (don't want to get too technical here, feel free to ask me if you want to know more) from their experience with Life Insurance products however later they realized that their assumptions were 100% incorrect. So much so that within 20 to 30 years of launching the product in the market, the premiums collected turned out to be insufficient to pay off the cost of claims. This was the case with all the insurance companies who offer LTC insurance in the US. As a result all LTC insurance companies had to apply for rate increase with the Department of Insurance (DOI).

The DOI does not approve the total increase requested by the insurance company straight away keeping in mind the interest of the insured. So the DOI approves only a fraction of the rate increase demanded by the insurance company which compels the insurance company to go back to the DOI in a couple of years.

This vicious circle will continue till such time the LTC insurance providers are able to increase the rates to an extent where the premiums not only cover the cost of claims but also make some profit!

So whether your rates have gone up or not, be prepared to receive at least 2 to 4 letters from your LTC insurance provider in the next 2 to 20 years asking you to either pay higher premiums to keep the same coverage or choose a lower coverage to keep the same premiums or a combination of both!

[REWahoo]

Quote:

Originally Posted by mask Whether the premiums for your LTC policy has increased so far or not, it is bound to increase multiple times in the near future (during the next 2 to 20 years).

Assuming I'm not incarcerated in a LTC facility this time next year, I'll keep this thread updated to check the accuracy of your forecast. Of course your prediction that my rates will increase over a period of 32 years (the 12 I already have under my belt + 20 more) is not something I'd want to bet against.

[mask]

Quote:

Originally Posted by REWahoo Assuming I'm not incarcerated in a LTC facility this time next year, I'll keep this thread updated to check the accuracy of your forecast. Of course your prediction that my rates will increase over a period of 32 years (the 12 I already have under my belt + 20 more) is not something I'd want to bet against.

Its not my forecast; its a fact probably known only to the insiders in the LTC industry!

[REWahoo]

Quote:

Originally Posted by mask Its not my forecast; its a fact probably known only to the insiders in the LTC industry!

Which would mean you are one of those insiders, right?

The reason I started this thread was the years of discussion/news/rumors/facts regarding huge rate increases on LTC policies led me to expect a big jump in rates once my 10 year guarantee expired. As the thread title states, I was (pleasantly) surprised when my premium remained unchanged. I'm keeping the thread updated for no other reason than to share my personal experience with our LTC rates.

[mask]

Quote:

Originally Posted by REWahoo Which would mean you are one of those insiders, right? The reason I started this thread was the years of discussion/news/rumors/facts regarding huge rate increases on LTC policies led me to expect a big jump in rates once my 10 year guarantee expired. As the thread title states, I was (pleasantly) surprised when my premium remained unchanged. I'm keeping the thread updated for no other reason than to share my personal experience with our LTC rates.

...If I were an insider, I wouldn't have let this secret out!

It is a good thread and is worth keeping it updated!!

[mickeyd]

Quote:

I got the notice of next year's annual premium today and the increase was...0. Yep, the same amount it has been for the past 10 years.

What did the insurance company say when you alerted them to this obvious error? You did alert them, did you not?

[REWahoo]

Quote:

Originally Posted by mickeyd What did the insurance company say when you alerted them to this obvious error? You did alert them, did you not?

Yes, of course I alerted them! Sorry, I can't reveal their response - it's a secret...

[packrat44]

Does anyone know if you are a VA Category 1 patient if you can receive care through the VA that is equivalent to that of a typical LTC policy?

[chinaco]

Quote:

Originally Posted by REWahoo Yes, of course I alerted them! Sorry, I can't reveal their response - it's a secret...

When you bought the policies....Were there other products with the same or similar features to compare against? Were they priced similarly?


The devil is always in the details. Aside from the basic coverage amount... Some products have broad flexibility and other have many restrictions.

[Independent]

Quote:

Originally Posted by mask Whether the premiums for your LTC policy has increased so far or not, it is bound to increase multiple times in the near future (during the next 2 to 20 years). Here is why I say so. When LTC insurance product was being designed and priced by the Actuaries, they had assumed some of the ratios (don't want to get too technical here, feel free to ask me if you want to know more) from their experience with Life Insurance products however later they realized that their assumptions were 100% incorrect. So much so that within 20 to 30 years of launching the product in the market, the premiums collected turned out to be insufficient to pay off the cost of claims. This was the case with all the insurance companies who offer LTC insurance in the US. As a result all LTC insurance companies had to apply for rate increase with the Department of Insurance (DOI). The DOI does not approve the total increase requested by the insurance company straight away keeping in mind the interest of the insured. So the DOI approves only a fraction of the rate increase demanded by the insurance company which compels the insurance company to go back to the DOI in a couple of years. This vicious circle will continue till such time the LTC insurance providers are able to increase the rates to an extent where the premiums not only cover the cost of claims but also make some profit! So whether your rates have gone up or not, be prepared to receive at least 2 to 4 letters from your LTC insurance provider in the next 2 to 20 years asking you to either pay higher premiums to keep the same coverage or choose a lower coverage to keep the same premiums or a combination of both!

Maybe you could get more technical. The only ratio I can think of that would have come over from life insurance was lapse rates. They can't keep getting lower and lower because zero is the lower bound.

If it's a matter of requested rate increases aren't getting approved, do you have numbers on what percent of the typical request goes through? (Company names would help here.)

[Independent]

Quote:

Originally Posted by samclem Yes, I did this calculation at the time. I don't recall the specifics, but the required rate of return on the side fund was very high, and totally unobtainable given the level of risk one would want to take for a fund with this purpose. Well, not quite. Since I wrote the initial post, the insurance company significantly increased their rates on policies with the included inflation protection, so even the "big boys" weren't able to make it work. This was because their investments weren't producing the expected returns, not because the cost of care had gone up (they pay out a set daily dollar rate, so the LTC insurers are largely insulated from rising care costs, that risk is left to the policyholder). In addition, insurers have some advantages that we'd lack-they get the benefit of all the policies that lapse or are abandoned early, and each policy doesn't need to cover that specific patient's costs (as long as all the policies written, in aggregate, cover all costs, in aggregate). As I said, I think these FPO policies may make some sense as part of a complete package. It's "cheap" coverage against a very early need for LTC, and one can still retain the flat benefit (without buying additional coverage to keep up with inflation) at moderate cost if additional insurance is declined starting at about age 65-70. But this requires a good understanding of the risks one is taking, especially with regard to inflation.

So if I understand this: Andy bought a policy with the intention of taking the FPO and paying increasing premiums. Bob bought one with a higher premium which was expected to be constant and included an increasing benefit.

Bob did the math on the original premium schedule and felt that the company must be including a higher interest rate than he could get in their calculation, so that's why he took the level premium. Later, the company discovered they couldn't hit their interest target and had to raise Bob's premium (they didn't have to do as much with Andy's because interest wasn't as big a deal on his policy). Correct?

It looks like we agree that one of the reasons the insurer can provide a higher apparent interest rate is that policies cancel due to death or voluntary termination. I intended to say an Andy can partially match the mortality gain by moving the fund to an immediate annuity at some appropriate age. He can view the voluntary termination angle as an option that he's buying. The insurer is giving Bob a better deal if they both stay, but Andy gets the better deal if they both leave.

I'm not claiming those facts make Andy's choice the "right" one. But they are relevant to me. Given the uncertainty of management and future premiums, I would want at least consider minimizing the money I put in up front.

[Purron]

Even though I have a technical background, I don't think of LTC insurance in primarily techincal terms. Seeing my MIL in LTC facilities for many years made DH and I realize we would want the best of care for each other - and options such as in home care to avoid ending up in one of those places. Plus, we wouldn't want the burden of bankrupting the survivor.

That's the thing about LTC insurance - it's both a complex financial decision yet very personal. No right or wrong decision. Yes, we're under the federal employee plan and got hit with that big increase, but we're hanging in...for now. Who knows what the future will bring? Both in terms of DH and I and the LTC insurance biz. Thinking about it is such a major bummer! Yet we need to think about it.

[samclem]

Quote:

Originally Posted by Independent The insurer is giving Bob a better deal if they both stay, but Andy gets the better deal if they both leave. I'm not claiming those facts make Andy's choice the "right" one. But they are relevant to me. Given the uncertainty of management and future premiums, I would want at least consider minimizing the money I put in up front.

Yes. And, reducing the money given to the insurer up front could prove really smart. These are multi-decade gaps between buying and needing the insurance, the requirement for insurance might well go down: there's every possibility that a broad federal LTC program will come along, Medicare might be expanded to carry the load, a broad national health care program might take over, or better private products could come along as insurers figure out how to price these products and make them attractive. Even the cost of providing LTC might go up more slowly than inflation--it's fundamentally low-skill labor, and if our economic trends continue we'll have a large number of people qualified to do it and needing work.

[dgoldenz]

Heard today that JH is discontinuing their current LTC product and introducing a new one with lesser benefits and higher rates....remains to be seen what will happen to current insureds. JH raised their rates big time last year on compound inflation policies and really isn't competitive anymore. Looks like Genworth is going to take an even bigger market share...

[Nords]

Quote:

Originally Posted by Purron ... and options such as in home care to avoid ending up in one of those places.

In one of "those places" it's a lot easier to be social, to have access to more activities, to easily be seen by a doctor or a nurse.

I know home caregivers for whom just getting to the doctor is an all-day affair. They're also responsible for entertainment, socializing, activities...

[Independent]

Quote:

Originally Posted by samclem Yes. And, reducing the money given to the insurer up front could prove really smart. These are multi-decade gaps between buying and needing the insurance, the requirement for insurance might well go down: there's every possibility that a broad federal LTC program will come along, Medicare might be expanded to carry the load, a broad national health care program might take over, or better private products could come along as insurers figure out how to price these products and make them attractive. Even the cost of providing LTC might go up more slowly than inflation--it's fundamentally low-skill labor, and if our economic trends continue we'll have a large number of people qualified to do it and needing work.

Yes.

[FinanceDude]

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Originally Posted by dgoldenz Looks like Genworth is going to take an even bigger market share...

Genworth might as well do something, they have to replace all that lost VA revenue!

[HFWR]

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Originally Posted by chinaco If one of us dies younger, we avoid some of the premium cost.

Think I'll skip that particular "money saving" option...

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Originally Posted by samclem I like the idea of being in a huge group...

Misery loves company...