the future of traditional LTC insurance premiums

In our last MoneyGuard discussion, we talked about the shrinking pool of insurers in the long term care market, and the issue of future premium increases in traditional LTC products.

We argued that MoneyGuard was a superior choice for clients who want to address the issue of future LTC costs.

That statement caused quite a bit of discussion and inspired a deeper dive into the issue of traditional LTC versus MoneyGuard.

future ltc premium costs

One of the big elements of the analysis is the future of premium costs for traditional LTC contracts.

With the assistance of Lincoln Financial, we pulled a portion of data from the California Department of Insurance around historical price increases, looking at both their frequency and magnitude to gain some insight into what the future may hold.

Essentially, the future of traditional LTC pricing is Pandora’s Box.

The vast majority of carriers have increased rates, many of them multiple times.

The magnitude of the increase is staggering: Most are well into the double digit percentages, with approved increases as high as 120%.

There are, however, a few exceptions to be found in a handful of carriers that can be found at the top of the financial rankings and also tend to have less exposure based on a smaller in-force block.

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total costs: moneyguard vs. ltc

To draw some meaningful conclusions from the data and how a traditional LTC contract might play out for a client, we went through the process of analyzing the total cost of both MoneyGuard and traditional LTC on a year-by-year basis.

We elected to use the frequency (every eight years) and magnitude (15% on average) of price increases at Genworth as the traditional LTC carrier for this comparison.

About the client:

  • Male, age 67
  • Preferred Health
  • $7,500 per month LTC benefit
  • 3% Compound Inflation

Click charts to enlarge:

ltc-vs-moneyguard

about the comparison

Assuming the client has a lump sum of approximately $250K available that will pass to their beneficiaries at their death, would they be better off buying MoneyGuard or traditional LTC and investing the lump sum?

The LTC benefits are virtually identical, so the difference comes down to the solution with the best liquidity – should the policy owner need to use it for other purposes – and the amount passed to beneficiaries in any given year if the insured dies without a claim.

the results

The results are compelling, and I would give the win on cash value to the side fund with one significant caveat.

I’m not sure you can achieve a 3% after tax rate of return in today’s economic environment with the same guarantees that exist in the MoneyGuard contract.

The cash analysis tips to MoneyGuard at rates below 3%. The net to heirs clearly favors MoneyGuard, assuming that future increases in the traditional LTC market follow historical patterns.

I’m not sure that’s a safe assumption.

Remember, we’ve seen single increases from carriers as high as 120%, which is simply going to force many insureds to walk away from their coverage right when it’s needed most.

These policy holders will find themselves without coverage and all the premiums paid over the years will have been wasted.

Most clients will trade the certainty that comes with the guarantees of MoneyGuard versus the massive uncertainty of future premium increases and a side fund that may or may not be there.

want to learn more?

If you’d like to learn more about the data behind our discussion of analyzing traditional LTC costs versus MoneyGuard, click here.

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