Long-Term Care Insurance Quandary: Keep Paying or Let It Go?
- April 24, 2023
- By: Roxanne Alexander CAIA, CFP® , AIF®, ADPA® - Senior Financial Advisor
Long-term care insurance companies are restructuring and have been sending letters to policyholders about adjustments in coverage, increased premiums or paid-up options. Many policyholders are wondering how they should respond and what their options are.
Increases don’t happen overnight, and insurance carriers have to consult with their state insurance department for approval. The state is in control of that decision. Sometimes the state will agree to the increase but with conditions such as telling the insurance company not to come back with a request for a certain period. They make increases for a class of policyholders, such as groups with common attributes like application dates and type of policy, so the insurance company is not singling out policyholders that may be more at risk of using benefits.
Some policyholders worry that their premiums may not provide any benefits when they are needed. However, due to the aging population, several policyholders will naturally drop off, and insurance companies are hoping that some policyholders will let their policies lapse instead of agreeing to rate increases.
Due to higher interest rates, insurance companies are also finally getting some yield on reserves, so they should be able to cover future claims. Even if an insurance carrier fails, another carrier typically buys them out to avoid the public losing confidence in the industry.
Long-Term Care Insurance Options Include Reduced Benefits
If the premiums increase beyond affordability, some people will choose the payout (and lapse the policy), a paid-up option, or reduced benefits. Some policyholders will not evaluate their options and cancel policies without consulting with an expert — this is good for the insurance companies, since they get the liability off the books.
Many insurance companies increase premiums over time, and you have no idea if or when this may happen. You might be paying $3,000 annually for a policy for fifteen years, and the insurance company decides to raise your premium to $5,000. After fifteen years, if you decide this is too costly and cancel the policy, you have already paid $45,000 to the insurance company and have not used the benefit.
However, consider looking at this like any other insurance product like homeowner’s insurance — you are essentially paying for peace of mind to offset a huge risk, although the probability of a claim may be low.
Can You or Do You Want to Self-Insure?
The decision on whether to keep your long-term care insurance vs. self-insuring is a question many policyholders are now faced with. Whether to cancel the policy and lose what you have put in throughout the years, or pay the increased premiums and possibly have future increases, is a big financial decision. Some policyholders purchased policies when they were younger and still accumulating assets. Then, as they get older, their nest egg has grown enough that they can sustain the costs without the insurance. Again, you were insuring a risk that was there for a time.
Maintaining coverage can be very advantageous if you end up needing it and don’t want to spend your assets to support the costs. If leaving a certain amount of assets to heirs or your spouse is important, even if you can self-insure, you may still prefer to have the insurance company share some of the liability.
If you can afford to self-insure based on your long-term financial plan, then the choice boils down to whether you would like to retain the risk or share the risk with the insurance company. From there, you decide what amount of coverage to keep or adjust. The goal is to take the worst-case scenario off the table.
A policyholder usually has the ability to adjust policy benefits down, but upping benefits may require new underwriting — you can always decrease coverage, but not increase. The insurance industry mis-priced products in the past, so if you were to buy the same policy today (assuming the same age as when the original purchase occurred), it would be significantly more expensive.
Clients who cannot afford to self-insure because they do not have enough assets accumulated may be able to buy an LTC policy during their earlier years. As time progresses, there may be a point where their assets can support a long-term care event — at this point, they can terminate their policy or modify it for less coverage.
Even if you modify coverage, this does not mean there will be no future increases. Keep in mind when a single person goes into LTC, their expenses may move laterally (you will probably sell your house and car and no longer travel, for example). However, with a couple, if one goes into care and the other doesn’t, the other spouse still has their usual living expenses, so the couple faces increased costs.
What Are My Options?
Insurance companies usually send a few alternatives along with the notice of a premium increase, but if you are not happy with the options, you can ask for options based on what you can afford or want to pay. The options you initially receive are usually skewed toward benefiting the insurance company and often look enticing to an inexperienced policyholder.
It is advisable to check with a licensed insurance professional before making a decision, as decreasing coverage or going along with a paid-up option may remove inflation adjustments, riders, or increase waiting periods. Instead of having a 90-day elimination period (when you have to cover the costs before the policy kicks in), you may end up with 180 days.
If you are considering this decision as a purely financial one, the place to start would be to find the break-even cost of an event and how much you would have paid in premiums by that claim age. You would want to see the break-even of total premiums paid vs. the benefit pool available on the claim. If you end up using the benefits, you will usually be better off. You will also want to factor in inflation and the growth rate on the funds had you invested them otherwise until the age you go on to claim.
Don’t forget to calculate what you would have saved on premiums in a side bucket at whatever age you are modeling to go on claim — what are you saving vs. losing in benefits?
Read the Fine Print
Insurance companies also offer hybrid long-term care products, such as LTC with a life insurance death benefit or annuity attachment, so it is important to determine what risk you would like to cover. Note that with these hybrid policies, going on claim could substantially reduce the death benefit.
LTC insurance can turn into a less-than-ideal investment at some point. The decision to buy is very individualized. If you happen to use it early, such as in the first five to ten years, it can be a good investment because you have paid less in premiums upfront and are using the benefits.
However, the longer you take to use the benefits, the more sense it may make to just put money aside yourself if you can afford to self-insure. Of course, there is no way of knowing if and when an event will happen.