Final December, I wrote a weblog about hedging against inflation by using the 10-pay option on long-term care insurance contracts. Long-term care insurance coverage 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 contact with longer-term inflation fears can be mitigated. After all, the insurance company could not raise rates after the 10-year period because you would be done paying premiums. That is a great idea, but the times they are a-changin’ and that 10-year option is going aside.
The inspiration for today’s blog comes from a seminar I am giving this week on the changing landscape associated with long-term care insurance.
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To understand the changes, and how my opinion is moving, you first need to understand the problem-well actually, two problems.
Low interest rates. Interest rates are at all-time lows, so insurance companies, just like the rest of us, cannot make just as much on their portfolios. This hampers their own pricing models since they assumed an increased interest rate on the premiums they take within and invest until benefits need to be paid.
Lapse ratios. Insurance companies presume a certain number of policies will be lowered each year. The problem is they guessed higher. Long-term care insurance is an psychological product because we are talking about householder’s health. People just do not drop this type of insurance very often. Thus, insurance providers are finding that their claims experience is a lot higher than expected and they have not taken in enough premiums to cover the actual must pay out.
Because of these problems, there are many large insurance companies that have gotten out of the long-term care business altogether in the last couple years. For the ones which have stayed in, premiums are going upward and benefits are being cut. The 10-pay option I mentioned above is one benefit some companies are cutting because they found they had too much risk in not being able to raise premiums in the future. Another benefit that is getting “tweaked” a lot will be the inflation rider, since insurance companies have found that trying to keep up with healthcare costs when they cannot earn that much on their bond portfolios is just too tough. It is a loss for consumers.
In my mind, the bottom line is that most people should consider purchasing long-term care insurance earlier than I would have originally thought, maybe in their early 50s. Buying LTC insurance earlier helps because one way insurance providers can limit their exposure would be to tighten underwriting requirements. Buying extensive care insurance earlier in life, if you are still healthy, can make a difference. Second, buying insurance earlier can give you a lot more options in how you structure the benefits to keep the premium within your budget.
Good in all of this is that premiums have gone up a lot over the last decade, particularly in the last two years. This is a good thing because it might just mean that insurance companies finally understand how to cost this type of insurance, which will make future rates steadier. Consumers should want that since we all want the insurance companies to be strong enough to pay claims. I don’t think insurance companies are going to stop providing long-term care insurance. But every time they do a little nip and stick with policy benefits to help make this type of insurance profitable, they make the insurance policies a little less generous than the ones that came before. In my estimation, these developments probably change the actively playing field enough that we should all look at long-term care insurance a decade in advance of when most people currently do.