Brian Haselden CLU, ChFC, LUTCF
Dramatic rate increases to existing traditional long term care policies are bringing an intense focus to an important aspect of retirement planning. High double digit increases in both individual and group coverage paired with a significant drop in providers offering coverage at all point to serious challenges for this type of policy (1). The insurance industry has an estimated 100 Billion to 300 Billion dollar shortfall in long term care policy reserves, otherwise known as money to pay long term care claims (2). The perfect storm of increased utilization, historic low interest rates, and adverse selection have helped create the problem. How did this happen? How should we address health care needs going forward?
The good news is that advancements in medical technology help us survive catastrophic health events such as strokes, heart attacks, and cancers that would have been fatal to previous generations. People are living longer. However, 70% of persons 65 and over will need care before they die as a result (3). Medical technology progressed faster than anticipated, resulting in higher claim rates.
Money comes in the door as premium and goes out the door as claim payments. Insurance companies operate on the interest earned in the interim. Lower interest rates means less money received and adds pressure on pricing. Premium increases are needed to make up for the lower than expected interest earned. Genworth (a leading writer of LTC policies) spokesperson Julie Westerman recently stated, Genworth “has taken a very proactive approach to rate increases, without which we would have needed much larger reserve increases.” (2)
Traditional long term care policies attracted less healthy buyers. Many healthy potential customers took a pass. To make matters worse, rate hikes incent the healthy insureds to drop their policies or seek greener pastures. Rates go up, healthy insureds leave, claim ratios go up for the remaining, creating the need for another rate increase. Rinse. Repeat.
Now may be a good time to review planning or coverage for retirement health care costs to access alternatives. Most of us can’t weather a large out of pocket medical bill. And I don’t know any wealthy people that want to willingly spend their money on medical bills. Most would prefer to transfer the risk.
(1) We Know LTC Will Implode. The Question Is How Bad Will It Be? , Arthur D. Postal, November 7, 2016
(2) GE Shortfall Just Part Of Insurance Industry’s $100 Billion Gap, ThinkAdvisor, February 8, 2018
(3) U.S. Department of Health and Human Services
Securities offered through Institutional Securities Corporation. Member FINRA/SIPC. Subsidiary of ISC Group.
Brian Haselden is a registered representative of ISC Group.