Long-term-care policyholders should be prepared for a rate increase of 20% to 30% every five years, says John Ryan, of Ryan Insurance Strategy Consultants, in Greenwood Village, Colo. Planning for price hikes is a good way to estimate how much you can afford to pay for a policy, even if rates don’t end up rising at that pace.
If your insurer notifies you that rates are going up, you don’t have to pay the higher premiums. You can usually shrink the benefit period or the amount of the daily benefit, extend the waiting period, or lower the inflation protection. John Hancock, which announced rate increases of up to 90% two years ago, kept rates the same for policyholders who reduced the 5% inflation protection to 3.2% or 2.7%, depending on the policy.
Before you decide what to do, calculate how much you’ve accumulated in benefits so far and how a change will affect future benefits -- as well as how much you could pay for care out of your own pocket. “The 5% compound inflation doubles the benefit every 15 years, and the 3% doubles it every 25 years. That’s a huge difference,” says Ryan.
It’s rarely a good idea to drop your policy and search for a replacement. Rates on new policies are 30% to 50% higher than they were five years ago, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. And your premiums will be even higher because you’re older, even if you’re in perfect health. A 55-year-old man would pay $4,680 per year for a Northwestern Mutual policy with a $6,000 monthly benefit, 12-week waiting period and 5% compound inflation protection. But a 60-year-old would have to pay $5,316 for the same coverage, assuming his health hasn’t changed.
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.