The high cost of long-term care insurance can be a burden, especially when rates shoot up with little warning. Have your LTC insurance premiums gone up recently? And if you have seen a big hike in long-term care insurance premiums, have you wondered what you should do?
For people with long-term-care insurance (about 7.5 million Americans in 2020), every year brings a twinge of nervousness as the companies send their letters telling policy-holders what the premium will be for the coming 12 months.
For policy-holders who bought LTC insurance in the past decade or so, the rate hikes might not have been quite as onerous, since the few remaining firms in the industry seemed to have learned how to price their products more accurately. But the odds are that those who purchased policies 15 or 20 years or more ago have seen huge jumps in premiums over the years.
Not If, But When LTC Insurance Premiums Will Rise
Regardless of when you bought your policy, the prevailing wisdom is that it’s not a matter of if rates will go up, but when – and by how much. We think it’s always good to plan ahead and consider what your options would be when that letter arrives with bad news.
With that in mind, we offer this 2022 Kiplinger article in which certified financial planner Evan Beach offers some food for thought. In Beach’s mind, should a hefty LTC rate increase come your way, you have four basic options – and the one you select depends on your circumstances. Let’s take a look.
LTC Insurance Premium Hikes Can Be Tough to Swallow
Writing in Kiplinger, Beach contrasts the price of insurance with the price of something we all need every day: gasoline for the car. “There is no more popular watercooler talk these days than the exorbitant price of gas,” he writes. “As with all buying decisions, you must decide whether the benefit is worth the cost. In the case of filling your tank, if you rely on your vehicle to get you to your job, that analysis is pretty easy.”
But clearly, insurance is far different. “When it comes to long-term-care insurance, and all insurance for that matter, the immediate reward is not there,” says Beach. “You have to pay today in exchange for the intangible benefit of security. All of this is to say, when that letter comes in the mail saying that your long-term-care insurance premium is increasing (again) by 20 percent, 40 percent or even 60 percent, it is an especially tough pill to swallow. After all, will you ever even use this insurance?”
Root of LTC Insurance Premium Issues Dates to 1970s
Beach offers what he calls “a bit of history” as a way to help policy-holders better understand their options should those rates take a leap. “Long-term-care insurance arrived on the scene in the late ’70s,” he recounts, “and, according to the American Academy of Actuaries, had an average issue age of 57. This caused two specific issues with pricing the policies accurately.”
First, he explains, companies had to project far into the future – 40 or 50 years in some cases – to predict costs and payment rates. That’s because LTC policies aren’t put to use until very late in life. “Second,” Beach adds, “in 1980 the yield on AAA corporate bonds was almost 12 percent. While this was historically high, most general accounts of insurance companies are made up of bonds.” The companies were riding high in those days.
LTC Insurance Premiums Rose as Companies Under-Estimated Costs
In other words, long-term-care insurance companies over-estimated profits and under-estimated costs. “Fifty years of bad assumptions combined with longer life expectancies have led to significant losses in the long-term care insurance business,” Beach writes. Estimates are that only about a dozen firms sell LTC policies in the U.S., a dramatic reduction over the past few decades.
This high rate of profit/loss mismatch is what triggers rate hikes. “When an insurance company can prove that business case to the state insurance commissioner, the company is allowed to raise premiums,” says Beach. When you as a policy-holder get the bad news, he offers four options – two of them are what he calls “Extreme” while the other two are “Middle Ground.”
Extreme Option #1: Cancel the LTC Insurance Policy
According to Beach, when the “dreaded letter” arrives, you can always cut the cord and cancel the policy – what he calls a “get out of jail (kind of free)” card. “Typically,” he writes, when you cancel, “you will get a check for some portion of premiums you paid, and the policy will go away.” (We’re not sure about that partial premium refund – no doubt it varies with your carrier and your policy terms.)
In Beach’s view, those who choose outright cancellation were probably “sold” the policy rather than “buying” it. “That is, some insurance agent did a good job of convincing them they needed it,” he explains. “However, the buyer never was fully convinced of the benefits.”
When does this make sense? Beach seems to feel that the choice to cancel only makes sense for a fairly small group of people. “When your financial situation has improved to the point where you can afford to self-insure,” then consider cancelling, he writes. “If you went into a facility for two to four years, you would be hurt financially but could afford it.”
Extreme Option #2: Accept the Full Increase
If cancellation is one extreme, then acquiescence is the other: just suck it up and write the check. “The folks who write the biggest premium checks are often the ones who have had family members need long-term care,” Beach suggests. “They ‘bought’ the policy because they were already convinced of the utility and need.” They are probably least likely to cancel.
When does this make sense? “When you have significant retirement assets or income and/or you bought the policy as an estate preservation tool,” says Beach. “Imagine you have $6 million in retirement assets. Entering a LTC facility in 15 years could wipe out $1 million pretty easily. You may accept the full increase as a bet that those premiums will total less than the cost of care and that the estate transferred to your kids will be worth it.”
Evaluating LTC Insurance Premiums with a Financial Dashboard
Rajiv Nagaich would suggest that both these “extreme” scenarios – in fact, the entire long-term-care scenario – really cry out for a financial dashboard. Without this important tool, you’ll be flying blind. But with a dashboard in place, these essential financial decisions can be made with far greater confidence – giving you the ability to chart your future course, no matter what. Using a financial dashboard, it’s far easier to see what the implications are for your financial future – with or without LTC insurance – if you someday need care.
Middle-Ground Option #3: Accept One of the Company’s Options
Clearly, insurance firms don’t want you to cancel, so they’ll offer ways to mitigate the rate increase by adjusting coverage. “The letter you receive from XYZ insurance company will come with two or three [adjustment] options,” Beach writes. These can include reducing the annual cost-of-living adjustment, reducing the monthly or daily benefit, or increasing what’s called “the elimination period” – the period of time before benefits kick in.
When does this make sense? Beach writes that making one of these changes might be a good choice if your coverage fails to match industry averages. Beach refers to a website called LongTermCare.gov which tracks statistics for things like the average cost and duration of stay. “Say, for example, your policy has a five-year benefit period and the average length of stay for a male is 2.2 years,” he writes. “If there is an option to reduce the benefit period to three years, I might recommend that path.”
Middle-Ground Option #4: Explore All LTC Choices
Even though Beach lists this one last, it’s actually where the conversation should begin. “This is always our starting point,” he writes. “It’s not to say that we won’t pick one of the above options, but we want to explore all available paths” – even the less obvious ones.
His advice, instead of trying to call your insurance carrier on the published customer service line – guaranteed to subject you to extended time on hold – is to reach out to your financial adviser to see if they have a better number to call. “They often do,” he suggests. “Once you get a representative on the phone, that person will be able to tell you the options that were not listed. There is often significant flexibility to adjust your policy to actually fit your needs.”
When does this make sense? Beach makes a bit of a leap here, but his advice is sound, we think: you should reach out to your financial adviser “when you have a financial plan that shows you the exact gap you would have to cover if you were to need care. The best financial planning programs have LTC insurance needs analyses that can show your exact gap.”
Beach doesn’t call this kind of plan a financial dashboard, but in our view, this is the kind of plan that works. Contact us and we’ll gladly recommend a planner who can assist you. And don’t wait until you get an unpleasant note from your insurance company!
Beach concludes by observing that difficult choices are “inevitable for most people with traditional long-term-care policies” as fewer companies offer traditional LTC coverage. But at the same time, he adds, there are “innovative new ways to pay for care.” We think his closing advice is sound. “Always start with your need. Let your need dictate your plan. Let your plan dictate your product.”
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(originally reported at www.kiplinger.com)