My client was rightfully concerned when recently notified that his long-term care insurance premiums could increase by 503% if he didn’t make adjustments to his policy. Should he keep the coverage as-is, or reduce the benefit amount or benefit period or inflation protection or elimination period?
Let’s look at why premiums are increasing, what each benefit option means, and how changes can affect your coverage.
Why Long-term Care Premiums Are Increasing
According to the American Association for Long-Term Care Insurance, premiums are increasing due to lapse rates, longer lives, increased cost of care, and interest rates.
Many of the policies experiencing rate increases were sold in the 1990s and early 2000s, and insurance companies assumed that 4 percent of policyholders would allow their policies to lapse. However, as policyholders grew older, they saw the importance of long-term care insurance coverage, and only 1 percent dropped their coverage. As a result, insurance companies had more people claiming benefits than they projected.
Moreover, people are living longer and have higher long-term care expenses than originally estimated. Based on a 2019 study by the American Association for Long-Term Care Insurance, policyholders who paid around $20,000 in premiums collected $2,000,000 in benefits.
Insurance companies are required to keep so much cash in reserves to pay out future claims. When they priced policies in the 1990s and 2000s, 6-month CD rates were around 6 percent, and insurance companies projected interest earning of 5 percent on cash. As you know, interest rates have been at historic lows for years, and the impact has been enormous on long-term care insurance companies.
Terms of Long-term Care Insurance
So insurance companies are struggling to pay the claims, and now you might be struggling to pay the premium increase. Insurance companies are offering options to reduce their cost and your cost, but at what price?
Is it worth reducing your benefits to reduce your premiums? Let’s look at the cost, assuming your policy provides a $300 daily benefit for six years with a 5 percent inflation rate and a 90-day elimination period.
- Inflation protection: If your daily benefit is currently $300 per day with 5 percent compound inflation, your benefit will be $623.68 per day in 15 years. If you reduce the inflation to 3 percent annually going forward, your benefit in 15 years would be $467.39. The daily difference of $156.29 translates to $57,045.77 in potential annual benefits or $342,274.62 over a six-year benefit period.
- Benefit period: Given the same daily benefit and accommodation for inflation, if you choose to reduce the benefit period by two years, your potential benefits in 15 years will be reduced by a total of $450,286.40.
- Daily/monthly benefit: Given the same six-year benefit and 5 percent compound inflation, you reduce your $300 per day benefit to $250 per day, resulting in a reduced daily benefit in 15 years to $519.73, a reduction in total benefits over six years by $227,650.50.
- Elimination period: Assuming a daily benefit amount of $623.68 in 15 years, if your elimination period is increased from 90 days to 180 days, your benefit is reduced by $56,131.20.
What Should You Do
Paying more in long-term care insurance is a bitter pill to swallow, but it usually makes sense to keep your current coverage if you can afford the increase. While not much consolation, buying a similar policy today would cost significantly more, and, in many instances, the same level of coverage is no longer available.
If your cash flow is too tight, then reducing benefits is the next best option, and it’s important to be strategic about those cuts. If your policy pays benefits for more than six years, consider reducing the benefit period since the average length of time needing care is two to three years.
However, if your family has a history of Alzheimer’s or Parkinson’s or other long-term illnesses, then keeping the longer benefit period could be crucial.
Suppose you still want to reduce your premium and keep the length of your coverage. In that case, you could consider reducing your daily benefit amount or inflation protection if you have already had significant growth in your benefits. For reference, the average cost for a semi-private room in an Indianapolis nursing facility (2020) is $240 per day, according to Genworth. You should review which option will continue to provide you the largest future benefit.
Please note that if you are an Indiana resident with an Indiana Partnership policy, you will want to ensure that your benefit amount will qualify to prevent Medicaid spend-down. In 2021, the Indiana Partnership LTC Policy Requirements are a minimum daily benefit of $115 and a total benefit amount of at least $430,014.
As you now know, long-term care reduction options can prove costly. Because this is a significant financial decision, it is recommended that you work with your financial advisor to determine what option is best for you and your family.
Meredith Carbrey is a Senior Wealth Advisor with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Meredith at email@example.com.