The cost of living rises every year, which makes paying for basic expenses more difficult. Long-term care (LTC) premiums are increasing, too. It’s become a focal point in the last several months as rates have gone up — the increased premiums can harm an individual’s quality of life and continued access to quality care. It’s an issue that hits close to home for me and my family, as my mom has seen her premiums rise by 50% over the past two decades.
According to the U.S. Department of Health and Human Services, someone turning 65 today has nearly a 70% chance of needing long-term care services and support. Currently, a growing client base who bought LTC insurance in the past is now seeing high premium increases.
While someone in their 60s and early to mid-70s may be able to manage a premium increase, the rate hike is much more difficult for those in their late 70s. The situation may have you thinking you need to reduce coverage or even forgo insurance altogether.
However, there are less drastic ways to tackle the issue and maintain premiums while handling the increased costs.
Why Are LTC Premiums Increasing?
Premiums have risen steeply over the past several years due to many factors. According to research conducted by the American Association for Long-term Care Insurance, the causes of high premiums include lapse rates, rising costs, longer lifespans and low interest rates.
Lapse rates are a big factor. Insurance companies priced policies under the assumption that 4% of policyholders would allow their policies to lapse. Yet, as the policyholders aged, only 1% discontinued their insurance, resulting in more people claiming LTC than projected.
People are living longer, too. Not only are more people submitting claims, but insurance companies are paying out for longer periods of time. Companies must maintain large reserves of cash to make sure they can keep up with the rising cost of medical care while balancing sharp decreases in interest rates that lowered returns.
It’s no surprise insurance companies are feeling the pinch, and they’re passing the pain onto policyholders.
Five Ways to Handle LTC Premium Increases
As a policyholder faced with an increase in LTC premiums, you need to find ways to cushion the blow and maintain the policy while dealing with the higher costs. Here are five ways you can go about handling the higher costs.
1. Shorten your benefit period
Carriers typically offer different benefit periods that can range from two to five years. Shorter benefit periods mean the insurance company will have to pay out fewer claims, and that can lower your premiums.
Keep in mind that the benefit period isn’t a finite amount of time. You may be able to stretch it out longer than you think.
For example, suppose you buy a two-year policy at $100 per day — that’s 730 days of care. But your benefit period could last much longer than two years if you don’t use the full $100 per day benefit consecutively.
Essentially, the benefit period is the minimum amount of time your policy would cover you. If you have a five-year policy, you may want to consider shortening it to two or three years to lower your costs.
2. Consider a shared care policy
Shared care is a type of long-term care insurance coverage for married couples. It lets spouses take out a plan and add their partners as a “rider.” As a designated rider, you can access the funds of your spouse’s plan if you exhaust funds from your own policy.
A shared care policy can reduce costs by pooling benefits together. Then, when either of you need coverage, you can split the coverage between the two of you. It can also extend your coverage. For example, if you and your spouse each have a three-year plan, you have the potential to tap into six years of benefits.
3. Think about a longer elimination period
The longer you make the waiting period before you start receiving payments, the cheaper your premiums can be. It’s like a deductible on car or home insurance, except it’s measured in time and not dollar amount.
Most policies have elimination period options of 30, 60 or 90 days. The longer the period, the longer it takes for the insurance company to kick in and start paying benefits, and the lower your long-term care premiums can be. The downside is you may end up paying more out of pocket — you’re responsible for paying the cost of any services you receive during the elimination period.
4. Reduce your daily benefits if you must
When buying your policy, you were likely looking for the best protection available. You may want to consider reducing the daily benefit as a last resort now that premium costs are on the rise. Instead of the maximum daily benefit, you can opt to pay for some of the daily benefits yourself. Lowering your benefit amount can automatically lower your premiums.
5. Contact your provider to ask about options
Every carrier offers different policy terms, and you may have other options to make your coverage more affordable. Contact your provider to ask about ways to lower your premiums before you determine your policy is too much for your budget.
It also helps to talk with a financial professional. A financial planner can review your situation, discuss your coverage needs, recommend an affordable plan, and address ways to lower the cost of your premiums.
LTC Premiums Increases: The Bottom Line
The rising LTC rates may be a shock. But remember you’re not alone. If the LTC price increase is making the insurance unaffordable, reach out to your provider or a financial planner to discuss your options. Reducing the benefit period can help in some cases. However, you likely want to avoid reducing the daily benefit amount unless necessary — it can negatively impact your quality of life and long-term care coverage.
The most important thing to keep in mind is that you have options. It may be possible to lower your monthly premiums and maintain your coverage, so you have the help when you need it most.
Every situation is unique. In my own family’s case, in 2000, I recommended that my parents purchase long term care insurance. They selected a $125 daily benefit for four years. At the time of purchase, my mom was 54 and my dad was 68. I advised my mom to select 5% compound inflation protection and my dad 5% simple inflation. The annual premium for Mom’s policy started out at $1,224 (I looked up the exact amount) and my dad’s was closer to $2,242 ( I looked up the exact amount) due to their age differences. In 2004, my dad was diagnosed with Parkinson’s disease. His condition precipitously declined in 2012. He did require assistance with the Activities of Daily Living and started using his benefits. Dad passed away in 2015.
Since my mom purchased her policy, she has experienced three price increases. Her annual premium is now $1,865 (I just helped her pay the bill) but her daily benefit has grown to $343. Her own mom lived to 94. At some point, we may freeze benefits, but for now these premium increases are manageable.
Many couples may be able to withstand one long term care event, but I think about the impact of the factor we cannot control: inflation, taxes, and market performance. The bottom line is that I would not want my parents to lose financial dignity in retirement.
Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. She is a CFP® professional, a Chartered Retirement Planning Counselor℠ and a Retirement Income Certified Professional. She helps educate the public, policymakers and media about the benefits of competent, ethical financial planning.