The long-term care insurance industry has caused a lot of shocks over the past year. Many current policy holders have been shocked to receive renewal notices with significantly higher premiums. Some applicants for new policies have been shocked to be denied coverage or offered coverage at standard, and not preferred, rating classes despite their relatively good health. And people inside the industry have been shocked by prominent insurance companies exiting the long-term care business or significantly revising the costs and benefits of their policies.
The decision to purchase long-term care insurance is an important one. The risk of significant costs for care that is not covered by Medicare is increasing and can be detrimental to your financial security. Unfortunately whether to get LTC insurance is not a simple, transparent decision.
Relatively affluent people can afford to self-insure their LTC costs. Low-income people won’t need LTC insurance because they are likely to spend down their assets and have Medicaid fund most LTC costs. But in between, there is a huge cross-section of the population – presently, the heart of the baby boom generation – that is caught in a tug-of-war between buying insurance and hoping for good health.
LONG-TERM CARE DEFINED
Long-term care is a catch-all phrase for a wide array of services for people who have physical or mental impairments that do not allow them to perform at least two activities of daily living – eating, bathing, dressing, grooming, toileting, transfer or ambulation (walking).
Whether or not to buy LTC insurance is not an easy decision. This is why when one study shows that 70 percent of people who reach 65 will need some form of long-term care services, only eight million Americans have long-term-care insurance policies. This means that the great majority of the risk is uninsured. Data compiled by the bipartisan Congressional Budget Office suggest that about one-third of LTC expenses are covered out of pocket, 60 percent are paid by Medicaid (after other assets are exhausted) and only four percent are paid for by private insurance policies.
FEWER OPTIONS FOR INSURANCE
The number of LTC insurance providers is shrinking. Both Prudential and MetLife recently exited the business. They continue to support existing policyholders but don’t offer new policies. Genworth, the largest LTC insurer with 40 percent of the market, recently eliminated discounts for excellent health, reduced shared policy (couples) discounts and eliminated the option to cover claims over a lifetime. All new Genworth policies will have coverage maximums rather than potentially carrying more open-ended lifetime benefits.
There are two primary reasons some insurers are leaving the business and others are either raising premiums or reducing coverage. First, far fewer LTC policy holders are allowing their policies to lapse unused than insurers projected. The reason people don’t let policies lapse is they don’t have to look far to see family members or friends whose finances have been depleted by long-term care costs.
Next, most LTC policies are sold with inflation protection so the policy will be able to pay a reasonable amount when claims are made potentially years into the future. The low interest rate environment has made it difficult for insurance companies to keep up with their inflation guarantees.
Therefore, LTC insurance premiums are going up for existing policies and for new ones.
If you have an LTC policy and are concerned about increasing premiums, consider whether the size of your risk is the same as it was when you began your policy. Do you still want to protect other assets for use elsewhere in your financial plan?
The premium increase may be hard to swallow, but you shouldn’t expect large jumps each year. In fact, some people think that insurance companies are now beginning to price policies more accurately so that future premiums may not rise to the extent of recent bumps.
If you are thinking about buying LTC insurance:
• Consider applying before age 60 when you are healthy and premiums may be less expensive.
• Plan on premium increases every three to six years for the life of the policy.
• Get a policy that will pay benefits for a short period (two or three years) to cover part of the risk.
• Don’t buy a cost-prohibitive “Cadillac” policy. A policy with $125-$150 of daily benefits can alleviate a lot of the sting of LTC costs without overfunding a policy that might not ever require a claim.
• Be conservative in the inflation provisions of your policy to keep costs low.
Of course, it’s a complex decision that requires a thorough review in the context of an overall plan for financial security, one that evaluates all available resources for retirement income and health care costs.Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, a registered investment adviser in Old Town Tacoma. Read more of his insights at www.themoneyarchitects.com.