Last December, I wrote a blog about hedging against inflation by using the 10-pay option on long-term care insurance contracts. Long-term care insurance is a hedge in that you use current dollars (premiums) to pay for future costs (benefits paid). If you can front-load the premiums by paying the policy up in 10 years, your experience of longer-term inflation fears can be mitigated. After all, the insurance company could not raise rates after the 10-year period since you would be done paying premiums. It’s really a great idea, but the times they are a-changin’ and that 10-year option is certainly going away.
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The inspiration for today’s blog comes from a seminar I will be giving this week on the changing landscape of long-term care insurance. To understand the changes, and how my opinion is shifting, you first need to understand the problem-well really, two problems.
Low interest rates. Interest rates are at all-time lows, so insurance companies, just like the rest of us, cannot make as much on the portfolios. This hampers their pricing models since they assumed a higher interest rate on the premiums they take in and invest until benefits need to be paid.
Lapse ratios. Insurance companies assume a certain number of policies will be dropped each year. The problem is they guessed high. Long-term care insurance is an emotional product because we are talking about people’s health. People just do not drop this type of insurance very often. Thus, insurance companies are finding that their claims experience is a lot higher than expected and they haven’t taken in enough premiums to cover what they must pay out.
Because of these problems, there are several large insurance companies that have gotten out of the long-term care business altogether in the last couple years. For the ones that have stayed in, premiums are going up and benefits are being cut. The 10-pay option I mentioned above is one benefit many companies are cutting because they found they’d too much risk in not being able to boost premiums in the future. Another benefit that is having “tweaked” a lot is the inflation riders, since insurance companies have found that trying to keep up with healthcare costs when they are not able to earn that much on their bond casinos is just too tough. This is a loss for consumers.
In my mind, the bottom line is that most persons should consider buying long-term care insurance plan earlier than I might have originally imagined, maybe in their early 50s. Acquiring LTC insurance earlier helps since one way insurance companies can limit their exposure is to tighten underwriting needs. Buying long-term care insurance early in life, when you are still healthy, can produce a difference. Second, buying insurance previously can give you more options in how you structure the benefits to keep the premium that fits your budget.
The positive in all of this is that rates have gone up a lot over the last few years, especially in the last two years. This is a good thing since it might just mean that insurance companies finally learn how to price this type of insurance, which will make upcoming premiums steadier. Consumers should desire that since we all want the insurance companies to be strong enough to pay statements. I don’t think insurance companies are going to prevent offering long-term care insurance. Although every time they do a little nip and tuck with policy benefits which will make this type of insurance profitable, they make typically the policies a little less generous than the types that came before. In my estimation, these kinds of developments probably change the playing field enough that we should all look at long lasting care insurance a decade ahead of when many people currently do.