For the past decade, the insurance industry and state regulators have been working on a new system for how life insurance companies determine whether they have enough money in reserve to pay out their claims. Known as principle-based reserving, the framework has been adopted by 46 states and was rolled out across the nation on Jan. 1, 2017. Insurance companies have three years to transition to the new system that uses simulation models to estimate the necessary reserves to cover future claims. Some experts in the industry expect life insurance premiums to drop as companies adjust to the new reserve requirements.[Read: 10 Things You Didn't Know Life Insurance Could Do.]The move to modernize life insurance reserves. The use of principle-based reserves represents a major shift for the industry, and one that reflects the changing face of life insurance policies. "If we go back 50 years, most of the life insurance products were very similar," says Nancy Bennett, senior life fellow with the American Academy of Actuaries. So it wasn't too problematic that state regulators required insurers to use a standard formula to determine how much cash to keep in their reserves for claim payments.However, the market has changed significantly, and companies now offer a variety of term, whole and universal policies. As a result, the old rigid system of calculating reserves no longer worked. In some cases, companies had accumulated large reserves, "far larger than what you would think would be needed," Bennett says.Since the formula didn't allow for variations, companies were unable to adjust the size of their reserves on their own. "We and other companies went to the NAIC [National Association of Insurance Commissioners] and said we want to work with you to right-size the reserves," says Shawn Loftus, senior vice president and chief actuary of USAA Life Insurance Company. The result of that work is the new principle-based reserving model, which offers companies more flexibility when determining how much capital to have on hand. The first wave of regulations affects two types of polices: term life and universal life with secondary guarantee.[Read: Should You Use Life Insurance to Fund Your Retirement?]Some premiums may go down. Bennett says it's hard to tell whether premiums will be affected as a result of the new principle-based reserves, but those in the industry are optimistic consumers will see savings. "The big picture from our end is this rule is going to make life insurance premiums cheaper," says Justin Halverson, founding partner at Great Waters Financial in Minneapolis.Term life insurance, in particular, could benefit from the change. According to a 2012 Impact Study from NAIC, companies are projected to reduce their reserves anywhere from 38 percent to 64 percent as a result of principle-based reserving. Loftus says USAA Life expects to drop premiums by up to 15 percent on some policies, with the average savings being 2.6 percent. Reduced premiums only apply to new policies and will not affect current customers.The situation for universal life with secondary guarantee is a little more complex. Joseph E. Roseman Jr., managing partner for O'Dell, Winkfield, Roseman and Shipp in Charlotte, North Carolina, says the structure of permanent policies shifted from whole life to universal life in the late 1970s and early 1980s. During the next two decades, business for universal life boomed, but reserves didn't always keep up. "They were minimally funding policies," he says.Now, the new regulations may result in some of those universal life policies needing to beef up their reserves. The 2012 Impact Study found some reserves may drop as much as 44 percent while others may need to boost their coffers by up to 63 percent. However, better reserves mean consumers can feel confident their plan will remain solvent. And life expectancy tables have been recalculated so premiums will be spread over a longer period, a change that should keep premium increases to a minimum.Lower your life insurance premiums. Consumers shouldn't expect to see their existing premiums drop as a result of principle-based reserves. The lower prices will only be for new policies, but that should still be welcome news for those living on a tight budget. "About 35 percent of our members are living paycheck to paycheck, so price is a big deal for them," Loftus says. To find out if they can take advantage of lower premiums, the company is recommending all its members conduct an annual insurance review.Part of that review includes getting quotes for a new policy or additional coverage to supplement an existing policy. Halverson cautions anyone getting quotes to be sure the company in question is actually using principle-based reserves. While some firms, such as USAA Life, are implementing the change immediately, insurers have until Dec. 31, 2019 to comply. And a handful of states have not yet adopted the new framework.[Read: 10 Financial Perks of Getting Older.]"[Another] big warning would be to not go dump your current coverage," Halverson says. Getting a quote at a lower cost doesn't mean the company will sell you a policy. The results of a health exam, for example, could result in an application being denied. "Make sure you've had a guaranteed offer," Halverson urges.Principle-based reserving represents a major change for the insurance industry, and it could have benefits for your bottom line as well.10 Tax Breaks for People Over 50.
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You need a crystal ball to know for certain whether you'll have to tap long-term health care in your old age. But for many people, the specter of pricey long-term care bills, and the burden they might place on family, is enough to make them consider buying long-term care insurance. In recent years, substantial premium hikes have earned long-term care insurance a reputation for being unaffordable. Experts say that rate increases primarily impacted older policies that were based on flawed assumptions, and consumers buying long-term care insurance today likely won't experience the same volatility. In the interim, the market has shifted and changed, with fewer providers offering traditional long-term care coverage. Curious about what you should know about long-term care insurance? Here's what to understand.What Is Long-Term Care Insurance?Long-term care insurance offers coverage for certain expenses associated with chronic health conditions, including professional help eating, bathing, dressing and using the bathroom. "It's health insurance for things you won't recover from," says Evan Beach, certified financial planner with Campbell Wealth Management in Alexandria, Virginia. Policyholders typically pay premiums on a regular basis until they pass away or need to obtain care. If they tap long-term health care, the insurance company will dole out a daily or monthly benefit amount to pay for eligible services, such as hiring a home health aide, utilizing adult daycare services or entering a nursing home. "Here's the rationale for even thinking about it," says Jesse Slome, executive director for the American Association for Long-Term Care Insurance. "If you live a long life, chances are that at some point between now and when you die, you're going to need services that are categorized as long-term care. That's typically care in your own home, or it might be in a facility like a nursing home."People often look into purchasing long-term care insurance policies when they're in their 50s or early 60s and still relatively healthy. Typically, younger purchasers are more likely to qualify and can score lower rates. Why Should I Buy Long-Term Care Insurance?Long-term care insurance provides coverage for expenses associated with chronic conditions and not covered by Medicare. Those who choose to buy a long-term care insurance plan are often hoping to avoid burdening a spouse or child with the work and expense of at-home or inpatient care. They may be seeking to protect their assets or concerned that long-term care costs will pulverize their financial legacy. Experts note that discussing the potential value of long-term care insurance is especially important for women, who statistically live longer than men, potentially outliving a male spouse, and spend more time utilizing long-term health care services. It's important to note that long-term care insurance isn't the right choice for everyone. Beach says that it's a worthwhile consideration for consumers in the "doughnut hole" or "dangerous middle." Those are people who have too many assets to consider Medicaid for long-term health care needs, but not enough assets to pay for long-term care out of pocket. Other consumers may decide they're willing to bet on friends or family to take care of them physically or financially in old age. And some may choose to roll the dice, crossing their fingers that whatever illnesses they experience later in life won't be long-lasting or require extended care services. But for those who are worried about burdening a spouse or children and want to ensure that their assets aren't hoovered up by pricey long-term care costs, long-term care insurance is an option. How Do I Buy Long-Term Care Insurance?Here's where it's starting to get a little tricky. Fewer insurers offer traditional long-term care coverage these days, experts say. And you want to make sure you truly understand the policy fine print, including cost of living adjustments, elimination periods, application guidelines, shared care options and other details before you sign on the dotted line. Shoppers can look to purchase a policy through an insurance broker – Slome suggests choosing one who's knowledgeable about the long-term care insurance market – or via an individual insurance company. Experts note that there are fewer insurance companies selling long-term care insurance products now than there were a decade ago. Some major companies selling long-term care insurance products include Genworth, Northwestern Mutual and New York Life. Your employer may also offer long-term care insurance, which is underwritten on a group basis, as an employee benefit. It can be slightly less costly than individual coverage to the employee and may extend to other family members. The process for applying and being approved for long-term care insurance will vary depending on the type of policy. But for traditional long-term care policies, "you can't tap it unless a doctor gives the OK," says Les Masterson, managing editor for Insurance.com, Insure.com and CarInsurance.com. Applicants for a traditional policy should be prepared to undergo a health screening, including a physical exam, blood, urine and memory tests, Beach says. If you're already experiencing problems bathing, walking, performing daily errands or are battling certain chronic health conditions, chances are good you won't be approved and will find it difficult to get the green light in the future. "If you apply and get declined, it goes into a database and you have to disclose it," Beach says. Another option is to shop hybrid long-term care policies. It's increasingly common to see insurers package a long-term care rider with a permanent life insurance plan, which allows you to use the death benefit for long-term care needs. Or it may be packaged as a long-term care annuity. The function and approval process for these types of hybrid products is different than for traditional long-term care insurance, so make sure you research the differences. What Strategies Can I Use to Reduce My Long-Term Care Insurance Premiums?Long-term care insurance has a reputation for being expensive, and it's deserved. According to data provided by the American Association for Long-Term Care Insurance, a single woman at age 55 could pay $2,700 as a 2019 annual premium for a pool of benefits initially worth $164,000. Over the long haul, she could pay five figures' worth of premiums for a policy she may never need to tap.It's a gamble that makes some people nervous. If the price itself has you turned off, know that there are strategies for reducing the cost of long-term care insurance. Consumers should shop around and compare prices from several different insurers to get the best deal. They should also start discussing the potential need for long-term care insurance while they're relatively young. Applying when you're healthy can reduce your premiums. Consider reducing your benefit, including daily limits, lifetime benefits and cost of living adjustments, to receive less expensive coverage. Don't forget that you may have access to a pension, home equity and other assets that can help cover the cost of long-term care, so you don't necessarily need the plan to cover 100% of expenses. "I will go to my grave saying some coverage is better than none," Slome says..