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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75376  
Subject: Re: Long Term Care Date: 3/29/2011 4:55 PM
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As I see it a LTHC policy is similar to whole-life insurance. Part of the premium is pure insurance and part of the premium goes to build up an internal cash-value to cover the eventual claim.

I think thats a good analogy.

Whole life insurance policies have a nonforfeiture clause so that you can get back some of this excess money if the policy lapses.

Do LTHC policies have such a clause? I'm thinking that you'd really really want to make sure yours does.


If you're speaking of qualified LTCI (and almost all LTCI policies sold today are of the 'qualified' type), then no, they may not accrue cash value. Rather, as you mention, the insurer must hold the [premium - that year's insurance cost (the costs paid out that year in claims to insureds) - administration and overhead] in long term capital reserve accounts to be used to pay future claims. It is this that has people like me worried and is the reason I won't insure through LTCI. QLTCI has only been around since 1998, and the insurance actuaries have not had the long term actuarial data on such factors as ADL trigger ages, survival period following the the second ADL or ADL recovery rates. These are crucial to determining future liability, required capital reserve and ultimately, current premium rates.

I don't know how insurers capital reserves are vis-a-vis' current premiums, and I doubt even state regulators have a good handle on this. But I do know that insurers have been incentivized to low-ball premiums up to this point to generate sales, and that over the past couple of years, many of the large insurers have been raising premiums. Of course, the big question mark on the horizon is what will premiums for a given level of coverage do over the next 20-30 years....will they climb until those future 80 year olds can no longer afford the premiums? Or, worse, will insurers capital be underfunded to the point that when elderly insured (or likely their children) start filing claims that the insurer turns their normal delays/stalling/stone walling into an artform? If so, will the denied claimants, or their children, be willing to begin the laborious process of 'fighting' the insurer?

I don't mean to sound overly pessimistic...just skeptical. And anytime you give someone with a profit motive a bunch of money each year for decades, with the promise that if certain conditions arise in those future years (inability to perform ADLs or severe cognitive disorders) they will pay you $X/month indefinitely, then I would think it prudent to be skeptical.

BruceM
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