Tuesday, June 4, 2013

Why Your Long-term Insurance Premiums Could Skyrocket

Most long-term care (LTC) insurance policyholders have become used to single-digit premium increases every few years over the past decade. But recently some have received the shocking news that their premiums have gone up 50%, 60%, 70%, or more.
So why the huge increase? There are a few reasons ...
First, insurance companies misjudged their customers
People are living longer than the industry had expected. And they’re using their LTC benefits more than anticipated. Plus insurers overestimated how many policyholders would let their policies lapse. The result: Companies paying out more money than had been estimated.
Second, blame the Fed
Insurance companies look to earn money on the premiums you send in. And they invest those dollars mostly in bonds. The Federal Reserve has pushed interest rates down to almost 0%, which cuts insurance companies’ profits.
Low interest rates have also made inflation protection a major liability for carriers. After all, how can an insurance company increase your benefit at 5% when interest rates are at half a percent? And a 5% compounded growth rate could double your benefit in 14-and-a-half years.
Therefore, premiums have to rise to make up the difference.
Third, newer data
Insurance companies now have data that wasn’t available years ago. And they’re using that new data when evaluating older policies, which are getting hit the hardest. This newer data reflects how long and how well people should live. And carriers now have figures showing that the cost of long-term care is increasing at an average of 4.7% to 6.6% a year.
Consequently, insurance companies are adjusting premiums to more accurately reflect this added risk.
However, carriers can’t just raise rates arbitrarily
Insurance companies have to make their case to state regulators for across-the-board increases that would apply to all policyholders. Even once the authorities give approval, there’s a waiting period before the new rates can go into effect.
Still that doesn’t stop companies from raising rates to try to make up past shortfalls or discouraging customers from renewing.
So what can you do about soaring LTC premiums?
Even if you haven’t been hit with a massive increase yet, get prepared. Contact your agent and ask if revising your policy’s benefits could reduce your cost. For example, changing a compound inflation rider from 5% to 3% could make a significant difference.
Review your investment portfolio, too. Make sure you have included inflation hedges, such as REITs, MLPs, and even precious metals that can help offset soaring health care costs.  
And you might want to consider getting a copy of A Boomer’s Guide to Long-Term Care. Inside you’ll find ideas for cutting premium costs, plus alternatives to long-term care insurance.
Best wishes,