Long-Term Care Sticker Shock
The price of long-term care insurance is rising. What can you do to cope with that? Answers range from self-insuring to applying early for the coverage.
The single woman in her early 70s got a shock when her insurer told her that her premium was going up by 76%, from $2,626 per year to $4,632. She bought the policy back in 2000, when it was more affordable. This boost is an outlier: Increases more typically are in the mid-single digit, and hers stems partly from the demise of the insurer that sold her the policy. Another company took it over.
Still, her situation illustrates how surprising these premium hikes are to clients. On her own with grown children living far away, she gave no thought to escalating costs when she bought long-term care insurance. Instead, she focused on the security the policy provided, that someone could care for her if she was incapacitated. “I did the right thing,” she figured.
Premiums for this coverage are rising faster than inflation, sometimes a lot faster. If you own long-term care (LTC) insurance, a company cannot raise your individual premium. But it can petition state regulators for an increase for all policyholders within a class. This is happening with greater frequency, especially for older policies.
Companies that were early to the LTC game underestimated the future healthcare costs. They also assumed a certain “lapse rate.” This means insurers expected people to pay for a while and drop the policy without filing a claim. That didn’t happen as people retained coverage in the face of soaring costs.
Aside from higher-than-projected claims volumes, the spate of premium increases, especially on older policies, stems from the 2008 financial crash. This produced low bond interest rates, declines in real estate values and slumping stocks – thus investment portfolio earnings and company reserves got hurt. In our lady’s case, the big driver behind the premium jump was the increase in what’s called the “benefit base” – the maximum amount the insurer will pay for daily services.
The insurance company offered her a way to avoid the premium increase by reducing a safeguard: her policy’s annual increases in benefits to keep up with healthcare inflation. The company wants to shift the bulk of the inflation risk to the policyholder.
Whether or not that is wise in her case is a function of holistic financial analysis. How much future risk can she assume versus an additional premium outlay of $2,006 per year, with no guarantee that future premium increases are not in the offing?
Rising healthcare costs pressure companies to change pricing in other ways. Up to now, age was the biggest factor in setting rates; gender had little role. But one major carrier just received state approvals to raise rates for single females, and other companies are likely to follow suit. The reason: Women tend to live longer than men, so an insurer will pay more in claims over time for female policyholders.
Notes W. Allen Johnson at iTrust Advisors, a nationwide insurance general agency, “The rates for women are expected to be 20% to 40% higher with gender-based pricing.”
Are there alternatives? Long-term care costs are a major risk to retirement security and financial independence. Do you retain the risk or outsource some or all of it to an insurance carrier? That’s a function of your cash flow-producing net worth and other sources of income, such as Social Security or a pension plan.
Could you handle catastrophic caregiving costs and not leave a surviving spouse impoverished? A financial advisor can help to frame current caregiver costs, weigh various assumptions about inflation and your current health status. The advisor then relates that to your cost of living, portfolio horsepower and caregiving resources. Medicare, which is neither cheap nor free, does not cover long-term care expenses and many other routine medical costs.
Are there alternatives to LTC insurance? We are seeing an increase in “linked products,” life insurance and annuity contracts that offer long-term care riders or chronic illness benefits. You may elect to self-insure some or all of the risk via other investments and inflation hedges. Repositioning lower yielding investments into higher yielding alternatives may produce sufficient cash flow to cover the increase or the entire premium.
As the baby boomer tsunami washes up on the shore of retirement, individuals live longer and demand more care in the face of growing doctor and medical facility shortages. That spurs price pressures.
Carriers are tightening underwriting standards, and you should apply while healthy. One in five applicants currently are rejected, and those over 50 get turned down at a higher rate than younger people.
Long-term care and the challenges of aging, healthcare and special needs should be part of a comprehensive financial planning analysis. As you age, include your adult children in the discussion, particularly those who might have to step in on your behalf.
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Lewis Walker, CFP, is president of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) in Norcross, Ga. Securities and certain advisory services offered through The Strategic Financial Alliance Inc. (SFA). Lewis Walker is a registered representative of SFA, which is otherwise unaffiliated with the Walker Capital Companies. 770-441-2603. email@example.com.
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