Premium Increases on Long Term Care Insurance: What is a Retiree To Do?
Thomas West, CLU, ChFC, AIF®
Partner, Signature Estate & Investment Advisors, LLC®
Vice Chair, Goodwin House Incorporated Board of Trustees
Many retirees who have taken the time to plan ahead for the possibility of long-term care by purchasing long-term care insurance years ago have been dismayed by the premium increases that insurance companies have passed on in the last few years. For some retirees, the premium increases have been very significant both in percentage and dollar terms. Premium increases of 25 – 150%, sometimes ranging in thousands of dollars, are not uncommon.
The reasons for the premium increases have been well-documented, particularly in the Washington, D.C., area where significant numbers of policyholders in the Federal Long Term Care Insurance program have been affected. Insurance companies have found in the last decade that the original actuarial and pricing models for the coverage were unsustainable and in many cases, very unprofitable. The Federal Insurance Office of the US Treasury reported: “In 2000, and again in 2014, state insurance regulators adopted model standards to address LTCI rate stabilization that were intended to reduce the frequency and size of rate increases.”
These standards, however, have not been uniformly adopted, implemented, or enforced by the states, and only apply to policies issued after the date of adoption.[i] This inconsistency of standards around rate increases can make the news of a premium hike not just unwelcome, but also an unfortunate surprise for many retirees.
Insurance alternatives to more expensive policies are harder to find as well. Somewhat outside of the eye of consumers has been the mass exodus of insurers from the new-purchaser market. In the beginning of 2017, the number of carriers offering coverage to new policy holders is down to around a dozen, from a high of over one hundred in years past.[ii]
The hotly debated analysis of how the long-term care insurance industry will fare in the decades ahead will continue for the foreseeable future, and it will be significantly impacted by state and federal regulators, interest rates and the willingness of insurance companies to stick with a market that so far has yet to yield a persistent profit.
Unfortunately, much of this discussion fails to help seniors who are faced with a more bread-and-butter decision to accept rising premiums, alternately reduce insurance benefits or drop the coverage all together.
Here, then, is some guidance about how to make decisions about long-term care insurance coverage.
- Know the insurance you have. In the advice that I have given over the years regarding existing insurance coverages, I’m no longer surprised that policy holders do not have a firm grasp of what coverages they have or how the policies work. Sometimes the policies themselves have been lost, and the only connection that the policy holders have with the coverage are the premium notices that arrive annually.
Lynn Tenbrink, Corporate Director of Sales for Goodwin House Incorporated, encourages residents not to wait until they are ready to move into a life plan or retirement community or in need of immediate care to be conversant on what is covered by their LTC policy.
“It is very important that active and older adults understand the amount of their coverage and what types of services are included,” Tenbrink advises. “Very often, a policy may only cover a small percentage of the actual cost of care needed when the policy holder has ‘assumed’ it would provide more comprehensive coverage.”
According to Karen Skeens, executive director of Goodwin House at Home (GHAH), over 50% of GHAH members have a long-term care insurance policy. Yet for many, it is not until they join GHAH that they get a clear understanding of exactly what their long-term care insurance policy may or may not cover.
“I meet with individuals who are passionate about remaining in their home as they age and have purchased what they believe is a policy that will afford them to remain in place, even when they need assistance with daily care,” said Skeens. “However, upon closer review, some were surprised to learn they have a policy that only pays for care in an assisted living or nursing facility.”
These are useful questions to ask about the long term care coverage in your contract:
- How much does the policy pay for long term care services? Does it pay different amounts depending on the location in which services are provided (e.g., home, assisted living facility, nursing facility)?
- Have your coverage amounts per day or per month increased with an inflation component in the policy?
- Does your contract have a waiting period or elimination period that must be exhausted before benefits are paid?Using a medical metaphor, it is hard to prescribe an appropriate course of action if you don’t start with a diagnosis of how things are currently. If you lost your policy, get a new copy. If you have your policy, read it and be prepared to ask questions, however naïve they may sound. In short, be sure you understand what you have been paying for and the benefits you will receive.
- Update yourself on the cost of care in your area. In the Washington, D.C., area, for example, the cost of care has risen faster than national averages for a variety of reasons. I recommend going to an objective third party source for cost estimates like the SourceBook from the Guide to Retirement Living [iii], which lists various care providers in a large section of the Mid-Atlantic region. If you have more targeted care providers that you are considering (i.e., if I need help, I’m likely to hire this homecare provider or move to this facility), take the time to update your assumptions about how much the right care options for you might cost.
- Know how much coverage you need. Many long-term care insurance policy holders purchased their contracts years ago under assumptions of need that might no longer be valid. I have counseled clients whose financial or personal situation has changed significantly since their long-term care insurance was purchased. Perhaps a spouse has died and a senior is no longer planning for two but for one. Perhaps seniors have inherited wealth that materially changed their financial circumstances.Occasionally a combination of unexpected work in retirement and/or better than expected returns in their portfolios have put policy holders in less tenuous financial situations having accumulated more wealth than expected. I always tell older adults to objectively measure what possible costs of care they can (and are willing to) pay for themselves before assessing their need for insurance.
- Evaluate the different options provided by the insurance company when facing a premium increase. Many companies give the policyholders options to reduce portions of their benefits in lieu of increasing the premiums. Sometimes policy holders have to prompt the insurance companies to re-run proposed illustrations to compare tradeoffs.
- How much does a policy holder have to reduce the daily benefit to keep premiums steady?
- How about reducing the total coverage pool, say from a five-year, $400K+ coverage cap to a three-year, $250K+ cap and keeping the premiums in a more tolerable range?
- Occasionally insurance companies make ‘custom’ benefit reduction options that vary from policy to policy. For example, some insurers have calculated in some of their premium increase notifications a specific reduction in the inflation benefits that would keep the premiums steady. One letter that I reviewed offered a tradeoff of a premium increase of 20% or a reduction in inflation benefits from a 5% compounding feature to a 3.2% compounding rate.
Keep in mind that many of the companies will allow for policy modifications beyond what is outlined in the initial premium increase letter. Call the customer support phone numbers that are provided in the premium increase notification to see what options are available beyond the summary that is initially presented. Also, make a point to know what the deadlines are for you to make a decision. Most of these premium increase notifications have a default election of the increased premium that goes into effect unless you elect differently.
- Consider alternatives to the new premium/coverage options. In some circumstances, (admittedly rare), there might be some insurance options outside of the existing contract that might serve the policy holder better. Unfortunately, many insureds are a bit older and might have health profiles that have changed since the original underwriting. I should note that I have seen instances that a re-evaluation of some in-force permanent life insurance has yielded solutions to the long term care insurance dilemma that have left policy holders pleased with an alternative life/long term care policy that they hadn’t considered.For most insured older adults and for a majority of the time, advanced age and changing health profiles prevent alternate insurance options from predictably offering relief. That said, the premium increases in the long-term care insurance might prompt a broader evaluation of current and future living and care arrangements. For example, a past decision to stay in one’s home might be revisited after a decade or more of post-retirement life in a house with its attendant costs and responsibilities.
- Think bigger. If a premium increase on a long-term care policy has demanded attention in the broader ‘What happens when I am less able?’ line of thought, my best advice is to be as intentional in pursuing your goals as possible. Seniors should be aware and comfortable with the idea that goals change. Things that might have been critical considerations at the time of purchasing the insurance might not have the same primacy now.If the most important thing now is proximity to family or being sure that spouses will never be separated, then figure out what needs to happen to make that as certain as possible. I find most typically that seniors underestimate the value of ready access to care and easy access to socialization in a friendly community.
Whatever defines the best life for the senior under a variety of circumstances should be rearticulated and communicated to family and/or to successor decision-makers. Sometimes this means redoing legal documents, estate plans, care options or investment priorities. Of course, most options have cost associated with them, and the long-term care coverage and premium decisions have their appropriate place in these considerations.
My best advice is this: if you have faced a long term care premium increase decision, get informed, consider options and goals that are valid in 2018, and be as ‘on purpose’ as possible.
[i] Federal Insurance Office, US Department of the Treasury, Report on Protection of Insurance Consumers and Access to Insurance (November 2016), p. 42.
[ii] Bipartisan Policy Center, America’s Long-Term Care Crisis: Challenges in Financing and Delivery (April 2014), available at http://bipartisanpolicy.org/library/americas-long-term-care-crisis/.