Insurance: Prices on the rise

“For clients who bought this policy on a limited budget to protect themselves, and now suddenly there’s an increase, where are they going to get the money from?” says Mark Halpern, certified financial planner, trust and estate practitioner, and president of Markham, Ont.-based illnessPROTECTION.com Inc. “It’s definitely a cause for concern.” Halpern also offers services via www.WEALTHinsurance.com.

Sun Life quietly announced in June that effective Jan. 1, 2016, the firm will raise premiums on all in-force Sun Life LTC policies sold between September 2005 and December 2013, as well as all on Clarica LTC policies sold prior to September 2005. (Sun Life acquired Clarica Life Insurance Co. in 2001.) The increase will range from 1% to 25%, depending upon the original product purchased, the premium-paying period for that product, and the age of the insured person at the time of purchase.

“One per cent isn’t a big increase,” Halpern says. “But 25%? Clients will definitely feel that.”

Most LTC policies have adjustable premiums, which give carriers the ability to change rates on blocks of in-force policies – typically on or after the fifth coverage anniversary – to reflect changes in the insurer’s cost of providing the coverage due to factors such as economic conditions, claims experience and lapse rates.

Although many U.S. insurers have hiked LTC in-force premiums in recent years – some by 45% or more – this marks the first time a Canadian insurer is taking this step.

Given that all insurers are facing similar challenges in providing this coverage, other Canadian providers might soon implement their own increases, says Karen Henderson, eldercare consultant and founder of Long Term Care Planning Network in Toronto: “One would not be surprised to see that.”

Low interest rates

Sun Life’s increase was triggered primarily by sustained low interest rates, according to a video in which Paul Fryer, vice president of individual business management, explains the premium adjustment to advisors. (Executives with Sun Life were unavailable for an interview.)

“You’ve already seen, over the past few years, how the ongoing low interest rate environment has led to industrywide premium increases for new business,” says Fryer in the video. “That same prolonged interest rate environment has also affected the pricing of our in-force adjustable policies.”

The increase does not affect new business. Sun Life increased premium rates on new LTC policies in December 2013 as a result of the same interest rate-related challenges.

Advisors who sold these policies are likely to bear the brunt of clients’ frustration when they learn of the premium changes. Even if advisors warned clients of the possibility of a rate increase, they may be caught off guard by the sudden hike, Halpern says. And those advisors who failed to inform clients of this possibility could face bigger problems.

“It could open a can of worms,” Halpern says. “We live in a litigious environment, so it’s not unreasonable to expect lawsuits to result.”

The premium increases south of the border have led to some uncomfortable conversations for insurance agents, says Scott Williams, president of the MarketPlace Group at Lake Forest, Ill.-based insurance brokerage LTCI Partners LLC.

“It has created a certain level of broker apathy,” says Williams. “We’re starting to see an uptick of brokers that have backed away from this [product].”

Insurers in the U.S., in which LTC insurance has been around far longer than in Canada, have had to raise premiums on these policies significantly over the years, partly due to lower than expected lapse rates and higher than expected claims on top of the economic challenges.

The result has been a drop in LTC policy sales in the U.S. Annualized new premiums fell by 22% to US$316 million in 2014 from US$406 million in 2013, according to Windsor, Conn.-based global insurance association LIMRA International Inc.

Industry players on this side of the border are concerned that the repricing could have a similar impact on sales at a time when the number of Canadians with LTC policies is already declining. According to the Canadian Life and Health Insurance Association Inc., 348,000 Canadians were covered by LTC policies at the end of 2014, down from 385,000 in 2010.

The product tends to be a difficult sell, partly because the premiums can be expensive – and get more expensive over time -and many Canadians don’t realize the hefty cost of health care that they could face in retirement.

Gap in financial plans

Advisors who don’t address this topic with clients, however, are leaving a gap in the financial planning process, Halpern says: “[LTC] insurance is still a very important part of somebody’s overall financial planning. There are a lot of people who are not learning about it, and are unprotected.”

In an effort to bolster U.S. sales, some insurers have taken steps to tweak their LTC offerings to try to avoid imposing such hefty premium increases on policyholders in the future.

For example, Boston-based John Hancock Life Insurance Co., a subsidiary of Manulife Financial Corp. of Toronto, recently launched a new LTC product in the U.S. called Performance LTC, which enables policyholders to earn “credits” that they can use to reduce premiums.

“Even though premiums in the policy are technically going up,” Williams says, “these ‘flex credits’ can ultimately offset those premiums.”

Insurers also have introduced a growing number of hybrid products, such as life insurance products with LTC riders, which have gained popularity in recent years.

Advisors with clients who are affected by Sun Life’s premium increase should be proactive and contact clients to discuss the impact, says Henderson. If clients are concerned about the cost, advisors can find ways of tweaking the policy to make it more affordable, such as dropping the inflation-protection feature or reducing the benefit amount.

“I don’t think it’s a very good idea to drop the policy completely,” Henderson says, “because then you’ll lose everything you’ve put into it.”

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