Here's Why Consumers Accept Hikes in Long-Term Care Insurance Rates

Consumers may be more willing to accept bad news and stick with their financial strategy if they understand their options and believe that they are in control of the decision-making process tied to long-term care.

Researchers with the National Association of Insurance Commissioners, a regulatory group, have published data supporting that view in a presentation on a new study they conducted for the NAIC.

Brenda Rourke, a communication research scientist at the NAIC, led a team that looked at how consumers might respond to premium rate increase letters from long-term care insurance issuers. The team surveyed 1,118 consumers ages 55 and older and also completed phone interviews with nine survey participants.

About 28% of the survey participants said they would be willing to pay more to hold their LTCI benefits steady, 25% said they would probably accept the reduced benefit offer and 16% said they would cash in their policies.

The survey team then showed the participants a hypothetical LTCI rate increase letter that described reduced benefit options, or RBO options, and looked at how the participants responded to the letter.

Survey participants "were more likely to accept the rate increase if they received a prior rate increase, thought the letter was clear and easy to read, thought the RBO options were clear, said they had enough information and were in control of their choice, [and] had confidence and belief in their knowledge and skills," the researchers wrote in a slidedeck summarizing their findings.

"Those who felt the letter was unclear and hard to read were less likely to pay the higher premium," the researchers said.

What it means: The NAIC team's findings may apply in a wide range of financial decision-making contexts.

It could be that clients are also more likely to hang on to a portfolio allocation after an equity market downturn or another strategy with disappointing early results if they feel they understand what's going on and what their options are.

The backdrop: Hundreds of U.S. insurers offered long-term care insurance, a product that can help policyholders pay for nursing home care, home care and other forms of long-term care, in the 1980s, 1990s and early 2000s.

LTCI issuers once boasted that they would not raise their premiums.

Since then, most issuers dropped out of the market, and most issuers with policies still in force have ended up asking for cumulative premium increases of 50% or more. They cited the effects of inaccurate policyholder behavior assumptions and low investment earnings on their LTCI operations' performance.

Regulators in typical states now require LTCI issuers that are imposing big premium increases to give consumers a choice between paying higher premiums, cashing out or accepting a lower level of benefits to hold premiums steady.

Consumer groups and regulators have asked how well older consumers understand the LTCI issuers' reduced-benefit-option offer letters.

The findings: Rourke and Jeff Czajkowski presented the study results last week in Chicago at an in-person meeting of the NAIC's Long-Term Care Insurance Task Force.

One incidental finding was an estimate of how much phantom long-term care insurance affects consumer surveys.

Survey teams often find that a surprisingly high percentage of participants say they have long-term care insurance.

Originally, 16% of the NAIC survey participants said they had LTCI coverage. After the survey team defined the term, the percentage of participants who said they had LTCI coverage dropped to 12%, meaning that about one-quarter of the participants who said they had LTCI coverage had phantom coverage.

Factors that increased participants' willingness to pay higher premiums included a belief that they would need care, a belief that peers would pay more, a higher level of financial knowledge and a higher level of aversion to risk.

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