Addressing Regulators' Concerns On Limited Pay LTC Insurance

If premium increases are necessary, LP should be calculated and assessed separately. But some experience factors, such as age-specific morbidity and mortality, can be combined to increase statistical reliability and because little variation in these factors is likely to exist between the blocks. Perhaps the only experience factor that really needs to be differentiated is the persistency.

For LP policies, affordability becomes a short-term issue, as long-term affordability (the more critical issue) is assured by the paid-up status. It should be noted that adding requirements such as nonforfeiture options reduces affordability, particularly on an after-tax basis in circumstances where tax deductions are capped.

Years ago, there was pressure to mandate shortened benefit period nonforfeiture provisions (SBP) in LTCI policies. Regulators showed outstanding statesmanship by resisting such pressure. Instead, many jurisdictions and insurers chose to require that SBP be offered.

The wisdom of not mandating SBP has been proven. More than 98% of the applicants affirmatively reject it. (Based on my experience, at least some of the other 2% have purchased SBP because their agents did not understand the provision.)

Mandated SBP has harmed constituents by discouraging limited pay LTCI. As a result, people have purchased lifetime premium LTCI and been exposed to greater risk of rate increase.

With lower lapse assumptions becoming common, the cost of SBP will decline, and hence, more people will purchase SBP. The negative impact of requiring SBP in the LP market will be less significant, presuming that insurers are willing to design different products in those few jurisdictions, establish different premiums, create different policy form structure, modify illustration and administrative system programming, and increase agent training and customer service costs, etc.

It is surprising that three jurisdictions still impose SBP on LP LTCI policies, because:

a) Contingent nonforfeiture provisions automatically provide the SBP benefit if huge premium increases occur.

b) Mandatory offer of SBP (required by most states and implemented by some insurers in all states) assures that every purchaser has the option to buy SBP.

c) Regulators could design a disclosure statement to explain the value of SBP.

d) Consumers have demonstrated that they dont like the provision on lifetime premium policies, where their long-term ability to pay is less predictable and the long-term unreturned investment is potentially larger. It is not surprising that they also have demonstrated they dont like the provision on LP policies, as evidenced by greatly reduced LP sales in states with nonforfeiture requirements.

One regulator argues emphatically that SBP is very valuable to consumers but should cost little, and thus should be mandated despite the above. He believes insurance companies are somehow trying to harm the client by not offering nonforfeiture and that agents are, en masse, giving bad advice to their clients. However, if his premise is accurate:

1) Agents are opening themselves up to liability risk and foregoing commission by discouraging the purchase of SBP. What possible explanation would there be for this behavior other than they truly believe that they are providing service to their clients?

2) Why would insurers incur the additional expenses cited above if they could automatically include a feature that is attractive and inexpensive? Why would they create complications for their sophisticated business clients who have employees in states with and without SBP mandates?

For the above reasons, Pennsylvania, a former leader in requiring mandatory nonforfeiture options for LP LTCI, now states that "the Department will no longer require insurers to issue return of premium and nonforfeiture coverage when selling policies using reduced payment plan options." ("Reduced plan" is synonymous to my use of "limited pay.")

Most regulators recognize that requiring special features on LP LTCI runs counter to their constituents interests and that suitable alternatives to mandatory benefits exist. People are attracted to LP LTCI because they fear that LTCI will become unaffordable later. I believe that anything we can do to create appropriate, affordable LP LTCI alternatives should be carefully considered.

is president of Thau Inc., a LTCI consulting and research firm in Overland Park, Kan. He can be reached via e-mail at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 27, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.