Four Options When – Not If – Your LTC Premiums Go Up

There is no more popular watercooler talk these days than the exorbitant price of gas. 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.

When it comes to long-term-care insurance, and all insurance for that matter, the immediate reward is not there. 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%, 40% or even 60%, it is an especially tough pill to swallow. After all, will you ever even use this insurance? In the next few paragraphs, I’ll give a bit of history to help you understand your options and figure out what makes sense for you.

Long-term-care insurance arrived on the scene in the late ’70s 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, because the insured will often not use these policies until very late in life, projections had to go out about 50 years. Second, in 1980 the yield on AAA corporate bonds was almost 12%.  While this was historically high, most general accounts of insurance companies are made up of bonds. Fifty years of bad assumptions combined with longer life expectancies have led to significant losses in the long-term care insurance business. When an insurance company can prove that business case to the state insurance commissioner, the company is allowed to raise premiums.

When you get the bad news, here are four options:

The extremes:

Option #1. Cancel the policy

When the dreaded letter arrives, it comes with a “get out of jail (kind of free)” card.  Typically, you will get a check for some portion of premiums you paid, and the policy will go away.  Most of the people who take this option were “sold” the policy rather than “buying” it.  That is, some insurance agent did a good job of convincing them they needed it. However, the buyer never was fully convinced of the benefits.

When does this make sense? When your financial situation has improved to the point where you can afford to self-insure. If you went into a facility for two to four years, you would be hurt financially but could afford it.

Option #2. Accept the full increase

The folks who write the biggest premium checks are often the ones who have had family members need long-term care. They “bought” the policy because they were already convinced of the utility and need.

When does this make sense? When you have significant retirement assets or income and/or you bought the policy as an estate preservation tool. 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.

The middle ground:

Option #3. Accept one of the given options

The letter you receive from XYZ insurance company will come with two or three options in addition to the two above. Examples: 1) Reduce the cost-of-living adjustment, 2) Reduce the monthly or daily benefit, 3) Increase the elimination period, which is the period of time before benefits kick in.   

When does this make sense? When one of those pieces of the policy falls way outside the averages.  LongTermCare.gov 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.  If there is an option to reduce the benefit period to three years, I might recommend that path.

Option #4. Explore all options

This is always our starting point. It’s not to say that we won’t pick one of the above options, but we want to explore all available paths. There will be a phone number on the letter that will inevitably lead to long hold times. If you have a financial adviser, see if they have a better number to call. They often do. 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? 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. Say, for example, if you need care you will have a shortfall of $200K.  You would adjust the benefit pool in the policy to match that need. 

Unfortunately, as you can see by the title of this column, difficult choices are inevitable for most people with traditional long-term-care policies. It is a space that is both shrinking and evolving. It’s shrinking in the number of companies willing to offer the traditional insurance product. It’s evolving with innovative new ways to pay for care. Always start with your need. Let your need dictate your plan. Let your plan dictate your product.