Understanding Premium increases in Long Term Healthcare policies

Question

Question confined to Long Term Healthcare policies that provide a fixed daily benefit (unrelated to cost of care) over a fixed number of months.

In trying to explain why a premium increase (of 50%) is needed Genworth says two things that prompt my questions:

1) that premium "set-asides" earn interest, similar to a savings account and 2) that more people who have purchased policies are keeping them (that is, are not dropping their coverage)

Relative to the first, I assume that insurers are investing in something other than a "savings account"; so what kind of investments might an insurance company make and how can a policyholder be certain that the insurer is investing wisely?

As to the second assertion, that suggests that an assumption is made (at the origin of the policy) that a certain % of policy holders will drop their policy before collecting any benefits. What is the magnitude (% of policy holders who will pay premiums and then subsequently drop the policy before getting benefits)?

(note that the citation says "industry experience has shown that many more people are keeping their policies than originally anticipated" - it does not say that many people are dying before collecting benefits.)

BTW, it is reasonable to anticipate that some policy holders will elect to drop their policy because they can no longer afford the increased premiums, so by increasing the premium the number of policies dropped can increase to some level that "the industry" considers "originally anticipated".

Answer 1

I can't tell you what happens behind the insurance company curtain because I have no clue what Genworth or other LTCI companies invest in or what their retention rates are.

What I can tell you is that it has been public information for many years that the actuarial assumptions made about policy retention were too low and that has been problematic for many companies, resulting in increased rates.

Since interest earned is a factor in setting rates, the Fed's zero interest rate policy for many years was another unexpected complication.

And lastly, I'd guess that incidence of claims would be the largest factor in rate increases.

I did a 10 pay policy with a 5% COLA almost 20 years ago. They cost a lot more per year but that ends in 9 years. Future premium increases are not my problem. I'm paid up and done. The other primary reasons that I did the 10 pay were because:

• I wanted that bill off the table before I was 60

• I believed that with the large number of baby boomers retiring (a larger retiree population), this might contribute to a higher incidence of claims, resulting in significant annual premium increases

If this is an academic exercise, ignore this 10 pay information. But if you have either just started a policy or you are looking for a policy, consider the 10 pay instead of the traditional policy where you will pay the premium every year for the rest of your life with periodic increases, unless you are disabled and receiving benefits. Also, take a hard look at Unqualified plans if you are well below age 55 (Unqualified refers to tax deductibility after age 55). If still the same, Unqualified requires one of the six disabling conditions versus two of six for Qualified.

Last of all, take all of this with a grain of salt since whatever I know relates to when I learned the relevant details of LTCI policies before I bought mine. Policies choices may no longer be what they were back then.