Long-Term-Care Rate Hikes Loom

Despite proposed premium increases, insurance is still the best way to protect yourself.

Policyholders were stunned when insurer John Hancock announced in September that it would ask state regulators for permission to boost premiums on many of its long-term-care policies by an average of 40%. For many of the insured, the proposed rate hike would come on top of a 2008 increase of 13% to 18%.

Then in October, Genworth, another major player in the long-term-care arena, announced that it would request an 18% rate increase for most policyholders who purchased insurance between 1994 and 2001 (or, in a few states, between 1994 and 2004), affecting about one-fourth of its policyholders. MetLife, another industry giant, announced in November that it would no longer sell new individual or group long-term-care insurance policies but would continue to service existing ones.

Almost every long-term-care insurer has raised rates at least once, and many are on their second round of price hikes. Northwestern Mutual is a rare exception. Although the company has always charged higher rates for long-term-care insurance than its competitors, it hasn't increased rates and has even given some money back to policyholders in the form of annual dividends.

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Now many consumers who have dutifully paid long-term-care insurance premiums for years are wondering whether they can afford the proposed rate hike, and some are asking whether the coverage is worth the higher price. Read on to find answers to some of the most common questions about the proposed rate hikes.

Why are insurers raising rates? A John Hancock study found that the number of claims, the length of claims and the use of benefits from 1990 to 2010 were much higher than the company had expected -- particularly the open-ended expense of providing lifetime benefits to an aging population with an increasingly long life expectancy.

"The claims on the lifetime coverage on our older policies were higher than our original policy assumptions," says Marianne Harrison, president of John Hancock Long-Term Care. "This won't be a viable product if we do not have sufficient funds to pay claims in the long term." (John Hancock stopped selling new policies with lifetime benefits in June 2010.)

Genworth says that it needs to boost rates because more people are keeping their policies in force than the company originally expected. "We priced these policies expecting to have a larger number of them lapse," says Beth Ludden, senior vice-president of product development for Genworth. "More people are claiming benefits than we had anticipated."

Whose rates will rise? For John Hancock policyholders, the size of the increase will vary depending on your age and when you purchased the policy. The increase applies to both individual and group policies, but it does not affect the long-term-care policy from John Hancock for federal employees, which already had a premium increase of up to 25% in the spring of 2010. The John Hancock rate hike will not apply to Leading Edge or Custom Care II Enhanced policies -- two of its newer offerings, which were issued after regulators passed stricter rate-setting requirements.

Is it a done deal? When will new prices take effect? The insurers need permission from regulators in most states before the premium increases can take effect. In the past, the large long-term-care insurers didn't have much trouble getting their rate hikes approved because regulators were convinced that the increases were necessary to ensure that insurers had enough money to pay claims.

But it might be tough to get approval for the rate hikes this time. "I think a lot of regulators are suspicious of this," says Bonnie Burns, a policy specialist with California Health Advocates. "They want the companies to prove that things are as bad as they say they are and to explain why they didn't know this sooner."

If regulators don't approve the full increase, they could endorse a partial boost or direct insurers to phase in their increases. Or they could reject the proposed rate hike altogether. "We anticipate that this will be a several-year process, as we work with the states to justify the increase and provide all the documentation they'll require to approve the rate change," says Genworth's Ludden. Policyholders will receive a notice before their rates rise, but that won't occur until early 2011 or later.

What are my options? You have three choices: Keep your policy in force and pay the higher premium, scale back your coverage to reduce your cost, or drop your policy.

You should hold on to your existing policy if you can afford it. "When an insurer realizes it needs a rate increase, the company would love nothing better than for existing policyholders to reduce or drop their coverage," says Marilee Driscoll, a long-term-care planning expert from Plymouth, Mass. That gets the insurer off the hook for potentially expensive claims.

If you can't afford to pay the higher premiums, you can alter your policy to lower the cost by reducing the benefit period, adjusting the daily or monthly benefit amount, extending the waiting period before benefits kick in, or changing the inflation protection. If you own a long-term-care insurance policy with lifetime coverage and are facing a premium increase, reducing the benefit period to three or five years could result in substantial savings on the premium, says Burns. And it would still cover most long-term-care needs because the average claim is for less than three years.

Can I switch to a lower-price policy? If you're in good health and purchased a policy during the past few years, it may be worth shopping around. [Visit the American Association of Long-Term Care Insurance's Consumer Information Center to locate a local agent and/or to request a rate quote.] But remember, there's no guarantee that a new policy won't increase rates in the future. And it's unlikely you'll find a better deal now that you're older. Premiums are based on your age at the time of purchase. "Each year that you wait to buy a policy, premiums can be as much as 5% to 12% higher," says Julie Gelbwaks Gewirtz, a long-term-care broker in Plantation, Fla. Plus, newer policies, which have to comply with stricter regulations, are more expensive than those issued within the past ten years.

Gewirtz ran numbers for several clients based on the proposed John Hancock increases. For example, a Florida man who bought a policy eight years ago, when he was 59 years old, has been paying $1,657 per year for a $130 daily benefit that increases by 5% per year, and he has a five-year benefit period. If the proposed 40% rate hike were approved, his premium would increase to $2,320 per year. But if he bought a new policy with a $170 daily benefit (what his existing policy is worth now) at his current age of 67, it would cost him $6,473 per year -- nearly triple the amount of his old policy with the proposed rate hike. And that assumes he is healthy enough to qualify for a new long-term-care policy. The risk of being denied coverage for medical reasons also increases with age.

Is long-term-care insurance still a good investment? Despite the proposed rate hike, insurance is the most cost-effective way to protect yourself from the potentially devastating expense of long-term care. The latest annual survey by the MetLife Mature Market Institute found that the national average rate for a private room in a nursing home increased 4.6% in 2010, to $83,585 per year ($229 per day). The average hourly rate for a home health aide remained unchanged at $21, totaling $210 for a ten-hour day (look up costs in your area at www.metlife.com/mmi).

Finding a way to pay for these potential costs is an essential part of retirement planning. "We talk about risk management with our clients before we talk about how their portfolio is going to be invested," says Matthew Jarvis, a financial planner in Seattle. "Who cares if you outperform the markets by x% if you lose it all to long-term-care expenses?"

Jarvis tells clients that there are only three ways to cover the potential costs: "You could pay for it 100% out of your pocket, you could figure out how to qualify for Medicaid, or you could buy long-term-care insurance," he says.

In most cases, Medicaid, the federal-state partnership that pays long-term-care costs for those who can't afford to pay their own bills, limits your choice of where you receive care -- often restricting payments to nursing homes rather than home care. And Medicaid kicks in only after you've spent nearly all of your money.

In the past, some people gamed the system by transferring assets to family members and waiting until the three-year look-back period expired before applying for government assistance. But tougher restrictions apply today. Since February 2006, assets transferred within five years of applying for Medicaid can trigger a prolonged ineligibility period, during which you are barred from receiving assistance. Previously, the penalty period started on the day you gave away your assets and often expired before you applied for Medicaid. Now the clock doesn't start ticking until you apply for government assistance -- at which point you may have no money left to pay the bills, and it could be months or even years before Medicaid steps in.

"Assuming the policy you are purchasing is in harmony with your financial plan, then long-term-care insurance is the best way to pay for long-term-care expenses," Jarvis says.

How much long-term-care insurance do I need? Jarvis recommends buying coverage based on your monthly cash flow in retirement and how much you could afford to cover out-of-pocket.

For example, if care in your area costs $5,000 per month and you can afford to pay $1,000 yourself, then you should purchase a policy that covers $4,000 per month for three years. Brian Gordon, of MAGA Ltd., in Riverwoods, Ill., who advises fee-only financial planners about long-term care, concurs with the cash-flow-based approach. "We see few people who are insuring 100% of the total expenses," says Gordon.

If you ultimately need long-term care, even policies that are designed to cover only a portion of your costs can be valuable. For example, a 55-year-old could buy a Genworth policy today for $1,480 per year that includes a $150 daily benefit, 5% compound inflation protection and a three-year benefit period. By age 80, he would have paid a total of $37,000 in premiums. But over those 25 years, his inflation-adjusted benefit would have more than doubled, to $330 per day. After only four months of receiving benefits, he would have recouped his entire investment, says Jarvis, and he would still have more than two and a half years of coverage remaining.

If you're thinking about buying a long-term-care insurance policy, don't stretch yourself too thin. Consider purchasing a shorter benefit period or smaller daily benefit, knowing that you might face rate hikes in the future. "I advise clients to expect a 30% to 50% rate increase at some point in the future," says Jarvis. "I hope that won't be the case, but I hate surprises."

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.