When you purchase long-term care insurance, it should offer peace of mind knowing you're covered as you age — but all too often Americans have opened policies only to have their premiums later rise to unaffordable levels.
Now, there’s finally some hope that the market has entered a period of stability, thanks in part to today's high interest rates. Bonds are the primary investments for many long-term care insurance investment portfolios. For years, low interest rates for bonds resulted in low returns, ultimately hurting insurers' bottom lines.
However, because of higher interest rates, they're now able to get better returns on your premium dollars. That's good news for customers.
Long-term care insurance became popular in the ‘90s. At the time, however, companies significantly underestimated their future claims and set their prices too low. Policyholders lived longer than expected and generally needed more expensive care than insurance companies anticipated, making the models unsustainable, experts say.
These pricing mistakes plagued the market, so much so that only six companies are still offering new policies, down from more than 100 at the peak, according to the American Association for Long-Term Care Insurance (AALTCI).
How interest rates affect long-term care insurance
The problems with the long-term care industry were exacerbated by the low-interest rate environment that lasted until 2022. Long-term care insurance companies make money through what's known as "float," or the money the companies hold after premiums are collected but before claims are paid out. Insurers typically invest these funds in corporate bonds.
When the Federal Reserve enacted its rate hiking-cycle in 2022 to fight inflation, it presented better opportunities for both short- and long-term bond investments. Last month, two-year corporate bond par yields reached 5.78%, while the 30-year bonds reached 6.17%. For context, in July 2020, the 30-year was yielding 2.79% and in February 2021, the two-year bottomed at just 0.37%.
Before corporate bond yields began to rise, limited investment returns combined with carriers' earlier pricing mistakes meant insurers had to hike prices in order to afford the policy payouts they'd promised. For policyholders, that led to unpleasant (and repeated) letters in the mail detailing premium hikes.
“Over the last 10 years, I've seen premiums double and triple,” says Todd Wolfe, senior insurance associate at Telemus in Southfield, Michigan. “It’s shocking.”
These surprise premium hikes forced customers to decide if the policy that they’d already paid into was worth keeping. When insurers get approval from regulators to raise premiums, customers usually have several less-than-ideal options, including paying more, accepting reduced coverage (such as shorter benefit periods or lower daily benefits) or canceling the policy.
Today, long-term care insurance premiums are higher but more stable than in the 1990s and early 2000s due to better underwriting and more responsible pricing, along with a more favorable bond market, Wolfe says.
Better bond returns brought on by high interest rates have also led some companies that offer hybrid life and long-term care insurance policies to increase benefits or reduce premiums for new customers to attract business and compete with other companies, according to Jesse Slome, director of the AALTCI.
The hybrid market is more competitive than the traditional long-term care insurance market, and so far, the latter hasn't seen similar premium reductions, Slome says. Eventually, though, he expects one of the remaining traditional long-term care insurance companies to follow suit, given that the increase in interest rates is a major tailwind. For now, customers can at least expect premium stability, he says.
“These policies have really almost no chance of needing future rate increases because interest rates are higher than when those policies were originally filed,” Slome says.
Do high interest rates mean it’s a good time to buy?
Charlie Gipple, founder of CG Financial Group, acknowledges that "consumers have been burnt over the last couple of decades by huge rate increases," but he agrees with Slome that the market is in a much better spot today and doesn't expect premiums to go up again in the near future. He says lower premiums are possible, but carriers will likely resist taking that step as long as they can.
On the other hand, Tom West, a senior partner at Signature Estate & Investment Advisors, still sees trouble ahead for long-term care insurance companies — namely that they may be underestimating the "tail risk," which refers to scenarios in which patients need expensive care for years, like with slower-progressing conditions such as dementia.
"The thesis that higher interest rates could help long-term care insurance, I think that it's directionally accurate, but it short changes the gravity of some of the other problems with long-term care insurance," he says. "The change in interest rates in my opinion is unlikely to be sufficient to mitigate some of these other factors."
West sees an ongoing risk of carriers jacking up premiums for existing customers due to pricing failures, and he says that's a serious concern given that this insurance is "terribly expensive right now and out of the reach of a lot of mainstream Americans."
A 60-year-old woman could expect to pay $3,325 per year for a policy with $165,000 in level benefits with a 2% inflation protection, according to the AALTCI. That makes the insurance unaffordable to many people. (To put that coverage amount into context, without insurance, long-term care costs range from an average $20,280 a year for adult day care services to $108,405 a year, on average, for a private room in a nursing home, according to the Genworth Cost of Care Survey.)
Because long-term care insurance is so pricey, experts usually recommend wealthy individuals self-insure, by saving enough money to be able to pay long-term care bills themselves. This approach is generally more cost-effective on average.
Yet for those who can afford the insurance but can't (or don't want) to self-insure, long-term care insurance can protect you from exorbitant expenses for stays in nursing homes or other care facilities, and experts agree the market is more stable today due to the rise in interest rates.
There's about a 70% chance that an adult turning 65 will need long-term care, per the Administration for Community Living, but only about 7.5 million people have long-term care insurance, according to AALTCI data last updated in 2020.
Traditional long-term care insurance policies are more attractive now because you don’t need to worry as much about premium hikes. But you may also want to explore other options like hybrid life insurance policies with long-term care insurance riders, especially because some companies in that more competitive market have lowered premiums or added benefits for new customers.
With these hybrid policies, it’s common to have a guaranteed premium, meaning you entirely avoid the risk of your insurer doubling your monthly or annual cost. The benefit is also considered guaranteed because the death benefit gets paid out if you die without needing long-term care.
The tradeoff is that hybrid policies are more expensive than traditional policies, so the old-school route is still your best bet if you want to maximize long-term care insurance coverage per premium dollar, experts say.
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