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CCH® BENEFITS — 2/8/08

Long Term Care Insureds Keep Their Coverage, Buy It At Younger Ages

From Spencer's Benefits Reports: Purchasers of long term care insurance policies seem to value the coverage and are keeping those policies longer than previously thought, according to a recent study by Schaumburg, Ill-based Society of Actuaries (SOA).

The SOA’s Long Term Care Experience Study found that voluntary lapse rates by policyholders dropped significantly to 5.5% in the period from 1985 to 2005, the time covered in the study. When the society issued a similar report on the experience of U.S. long term care (LTC) insurance carriers from 1985 to 2002, the lapse rate was 7.4%. According to the SOA, this finding probably is the most significant as LTC insurers previously had overestimated the lapse rate for LTC policies, which resulted in underpriced premiums. In response, the LTC insurers raised their premiums substantially in the years between 2002 and 2005, the SOA noted. The premium increases depressed the LTC insurance purchase rate.

Surprisingly, the lapse rate was highest for the lowest-priced LTC policies and lowest for the most expensive ones, the study found. Perhaps buyers of cheaper policies do not value them as much as other policy owners, suggested Roger Gagne, assistant vice president of actuarial services for long term care for John Hancock Life Insurance Company, a contributing author to the report.

“Perhaps the more expensive the policy, the more thought they put it into it,” Mr. Gagne suggested, noting that married couples who both have LTC coverage also tended to maintain their coverage. Also notable is the near doubling of the number of LTC insureds filing claims—95,000 by year end 2001, compared with 172,000 by year-end 2004. The average total termination rates, including lapses and policyholder deaths, dropped significantly, from 8.9% to 6.8%.

Furthermore, from 2001 to 2005, the benefits term for LTC policies has stretched from no more than two years to three to five years. In 2001, 43% of policies covered the shorter period, compared with 35% in 2005. The proportion of policies providing benefits for three to five years rose from 25% to 28% in the same period of time.

More policyholders in 2005 than in 2002 filed claims for care at home or in the community—26% versus 15%—while claims for nursing home care plummeted from 80% of claims to 55%. Nearly 20% of claims in 2005 involved both nursing home and home care, up from only 5% in 2002. The average number of home health care visits per week dropped from 4.2 to 3.2.

Alzheimer’s was the single leading cause for LTC claims (24.3%). Nursing home care for Alzheimer’s represented 26.7% of such claims and home care represented 17.6%, with costs being $59,000. The next two most prevalent reasons for LTC were stroke (13.3%) and circulatory disorders (10.4%). Following Alzheimer’s in terms of highest average costs were: nervous disorders ($50,000), stroke ($44,000), and mental illness ($43,000). Alzheimer’s and mental illness had the highest average claims periods—659 days and 600 days, respectively.

Average issue ages dropped somewhat from 2002 and were significantly lower for group insureds than for individual insureds, 46 years (down from 47), compared with 64 years (down from 67 years). However, the average age of first claims was nearly 79 years, one year earlier than in 2002, and the average length of claims was 1,040 days, up from 914 days three years earlier. Most LTC insureds were women, 57%, down from 59% in 2002. The incidence of claims in relation to the number of insureds dropped slightly from 0.68 to 0.64, the SOA found.

The report analyzed data from 24 insurers on policies issued between Jan. 1, 1984, and Dec. 31, 2004. Claims incurred on policies in force were followed from claim beginning date through June 30, 2005, or claim termination, if earlier. For more information about the study, visit http://www.soa.org.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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