Aging Options

Soaring long term care rates leave seniors without a safety net

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When you were in your 50s, you may have joined a very select group of people by buying a long term care policy.  It may have seemed like the ideal way to keep control of the prohibitive costs of long term care.  And when you were in your 50s, it probably was.  But 20 years later, there’s a letter from your insurance company to inform you that your rate will jump 50, 60 even 70 percent over its cost from last year.  Last year at this time you received the same sort of letter so that the policy you bought has suddenly ballooned in costs to $6,000 a year or more for you and your spouse and you wonder how long it will go on before the cost is so prohibitive you simply can’t afford to pay for it and you’ll have to drop it.  That’s the quandary for individuals looking to buy long term care insurance.  Long term care costs are one of the greatest economic risks older individuals face but the insurance is expensive.  It’s not just expensive for the consumer.  It’s expensive for insurance companies as well.

There are a couple reasons insurance companies keep raising the rates.  The first is that people don’t drop their policies.  Say for instance that you bought fire insurance on your house but 20 years down the line you decide to change your insurance company or move and you drop your policy.  As long as you never have a fire, when you drop your policy the insurance company doesn’t have to pay out on that policy.  Let’s take it one step further, the chances that you will have a house fire are less than 1 percent but the chances that you’ll actually need to use your long term care policy at some time in the future are about 70 percent.  Which means that consumers who pay on their policies for decades see dropping their policies as a loss of their investment so the number of people dropping those policies is closer to 2 percent or less.  Well, insurance companies “gambled” that 5 percent to 7 percent of people who bought their long term care policies would drop those policies and the companies would not have to pay out.  Consequently companies that figured a higher drop rate should have figured that higher rate into their premiums and didn’t.  To make up for it, those companies either dropped out of long term care insurance or raised their rates but there is another problem.

Insurance companies take the money you pay for a premiums and invest that money.  But state insurance commissioners wants that money protected because it is typically a long time before someone actually uses a policy.  Thus state insurance regulators require that investment to be in ultra-safe bonds but if you’ve looked at buying ten-year Treasury bonds recently, you’ll see that they are returning 2.64 percent, a jump of more than a percentage point since May but still low.  However, insurance companies have inflation protection clauses in their long-term care policies that pay out at 3 percent to 5 percent.  Even with the jump in interest, they are losing money.

A decade ago, 100 companies sold long term care insurance.  One of the results, as can be imagined, is that the number of companies offering long term care insurance is dwindling.  Today, consumers have a choice from among about a dozen companies.  With fewer companies offering the policies, those companies that want out of selling policies have a harder time getting rid of the policies causing premiums to go through the roof and leaving consumers who want to plan for long term care stuck between a rock and a hard place as government programs to pay some long term care costs also shrink.

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