Sally Wylie was stunned when her long-term care (LTC) policy premium almost doubled-a life insurance cost increase. According to the Wall Street Journal, the one-time learning specialist took on part-time work, and she and her husband cut back on expenses.
Permanent life insurance has experienced similar, large cost increases. We have received more than one hundred emails from consumers about the cost of insurance increase on their life policies. Some people, like Sally and her husband, scrimp in other areas to pay the increased policy costs. Others have simply dropped coverage, which I suspect many long-term care policyholders have also done.
The Low Interest Rates Fueling Life Insurance Cost Increase
The cost increase dilemma facing life and long-term care policyholders stems from the decade-long, historic low-interest rate environment. Insurance carriers take in premiums, invest them and (hopefully) generate enough investment income to pay out future benefits and still make a profit. Most insurers invest their general accounts primarily in high-grade corporate bonds. As the chart to the right points out, bond rates have been slipping downward for the last 35 years. And since the market crash of ‘08-’09, interest rates have dropped to never-before-seen lows.
John Hancock raised premiums dramatically after interest rates dropped by about 33% (2).
Interest Rate Spread
Current assumption universal life insurance carriers profit from what is called the interest rate spread. They invest at 6%, credit the policy 4% and keep 2% as “profit.” One carrier was contractually obligated to credit their policies 5.5%, even while their investment earnings were under 5%. No profit there.
Most LTC and life insurance policies experiencing the cost increase are older policies that insurers wrote in the ‘high’ interest years of the ‘80s and ‘90s. This is another characteristic these policy increases share. They both impact older aged policy holders who have paid premiums for 20 or 30 years. Many retirees, who have reduced income due to low interest rates in conservative investments, now face higher costs driven by those same low interest rates. And for most older life and LTC policy holders, there is no alternative. They are typically too old or unhealthy to obtain more economical coverage.
Another similarity is that carriers are providing both life and LTC policyholders, as a principal option, the ability to maintain the same premium cost by lowering the benefit that would be paid, reducing carrier liability while still retaining their cash flow. In every life insurance COI increase notice we have received, reduction of death benefit to retain current carrying cost is proposed as a policyholder choice. And LTC carriers are leading with the same benefit-reduction option.
Many policyholders—both LTC and life—are simply abandoning their policies after years of premium payments, potentially risking their retirement security. An article in the Wall Street Journal lamented the fact that use of private retirement insurance products is dropping, with the burden being shifted to public plans (3). The needs of a widow whose husband dies without life insurance or a couple incurring large LTC bills without resources will shift to and drain the public system going forward.
As the article pointed out, “retirement security isn’t just about having a nest egg, but…also about having options for turning that saving into security.” For some who have seen the costs of their life insurance and LTC policies rise, some of their retirement security may be slipping away.
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- “Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice.” Leslie Scism, Wall Street Journal, January 17, 2017.
- “Another Big Long-Term Care Insurance Premium Hike.” Howard Gleckman, Forbes Magazine, August 1, 2016.
- “Retirement Insurance Products Are Disappearing. And That’s Dangerous.” Benjamin Harris, Wall Street Journal, April 13, 2018.