Premiums Rising for Existing Long Term Care Policies

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If you are planning for retirement, you may be considering the purchase of long-term care insurance long term care (LTC) insurance to help pay for health-related expenses in your later years. However, you should examine the policy terms carefully because policy premiums are typically not guaranteed for more than five years.

In fact, financial planner Rona Birenbaum recently brought to my attention a message to advisors from from Paul Fryer, Vice-President, Individual Business Management, Sun Life Financial regarding increases to premiums for in-force LTC policies.In this video, he explains further why the premium increase to in-force LTC insurance business is necessary.

Fryer noted that effective January 1, 2016, in-force LTC policies will see a premium increase ranging from 1% to 25%, depending on three factors:

 

  • The original product purchased,
  • The premium paying period for the product, and
  • The age of the insured person at the time of purchase.

 

Sun Life will be contacting clients affected by letter in the month before their premium change notice goes out. Once a client receives a letter, if he informs his advisor that he can’t afford the increase, plan change options available to help keep some coverage at a lower premium will be discussed.

When I asked Birenbaum to comment on the significance of this price increase for both current and future purchasers of LTC insurance, here is what she told me:

 “Sunlife’s recent announcement that long term care (LTC) premiums are increasing for new and existing policies should not be a surprise to anyone and is likely a harbinger of increases from other LTC providers.

 Long term care insurance is in its infancy in Canada in a similar way that critical Illness insurance (CI) is also relatively new.  When new products are launched, actuaries do their level best to assess the likelihood of claims so that premiums are set at a level that will ensure profitability for the insurance company.

 The profit motive is balanced against establishing prices that the marketplace will accept, and that are competitive with other insurers offering similar products.

 As has been the case with critical Illness insurance, insurance companies are beginning to realize that they underestimated the level of claims and are increasing premiums in response.

 What is different about Sunlife’s recent rate move from the increase in CI premiums is that it is affecting existing policies as well as newly issued policies.  This is because many LTC policies only guarantee the premium for the first 5 years of the policy.

 The lack of rate certainty presents a real conundrum for those considering such insurance.  If one cannot quantify the cost of the insurance, it is not possible to make an assessment of whether or not the cost is worth the risk being transferred to the insurance company.

 If you are buying a car and the cost is $30,000 but there is the possibility that after 5 years you may have to spend another $10,000 for not reason other than the car company decided that they weren’t profiting enough on the initial sale, would you make that deal?

 In the short-term, competing insurers may have a price advantage and may maintain it to attract market share.  However, over time, with limited competition in this space, rates will likely increase across the board.  In any event, at best, a new policy taken out now will be subject to a rate increase in 5 years.”

At my request, to illustrate the impact of the price increase Birenbaum obtained a hypothetical LTC insurance quote from Manulife Financial for a couple who is age age 55 today  (John and Mary) for a maximum of $300,000 shared coverage that would pay $3,000/month to a residential facility or $1,500/month for non-facility care with a waiting period of 90 days.

In  total John and Mary will have 100 months (8.33 years) of residential care benefits of $3,000/month they can draw on. If one predeceases the other, the balance of the protection will be passed on to the second spouse and the premium reduced to single life.

The monthly premium offered by Manulife is $282.49/month or $3,138.72 annually (there is a discount for annual payment).  So, if premiums increased 25% in five years, the monthly cost would be $315.61/month  and the annual amount would be $2,923.40. Price increases could continue at five year intervals beyond age 60 depending on the policy.

Sun Life reports that in 2014 long term care costs in Ontario government-subsidized nursing homes/long-term care homes was $2,438.81/month. Retirement homes with no government subsidies can range from $1,200-$7,000/month. Coast for care in other provinces are also available.

Also read:

Five things to know about long-term care insurance
Long-term care insurance can be expensive

 

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