Long-term care insurance was introduced in the 1980s to solve a growing problem for the middle class: How to shoulder the staggering cost of long-term care. If you were not poor enough to qualify for government programs and not wealthy enough to self-insure, buying a policy would provide peace of mind that you would get the care you might need without bankrupting your family.
Those policies are now known as traditional, or stand-alone policies. Unbeknownst at that time, they were based on flawed predictions. As time went on, it became clear that policyholders were living longer than the actuaries had anticipated; fewer policyholders were letting policies lapse; and the number of claims that were filed drastically exceeded projections. Lacking sufficient reserves to cover payouts, insurance carriers began hiking premiums meteorically, blindsiding policyholders. One particularly egregious example occurred in 2019, when Blue Cross/Blue Shield of Florida raised premiums by 94% (they had asked state regulators originally to approve a 280% increase). “No one disputes rate hikes are a way of life, no matter what you’re buying, but this is way, way outta control,” one financial planner was quoted as saying in a 2022 report from the National Association of Insurance Commissioners.
Today the market has stabilized somewhat. There are tighter regulatory controls, and new types of policies are available (we will discuss the new generation of policies later in this post). Premiums on policies offered today are more likely to remain relatively stable. But traditional long term care policies are still not cheap: According to a 2023 price survey from The American Association of Long-Term Care Insurance, a healthy 55-year old man with a policy that pays out $165,000 in immediate benefits and includes 3% annual benefits increases can expect to pay an annual premium of $2,100. The premium for a woman of the same age and health status is $3,600.
Facing Premium Increases? Keep These Facts in Mind
Insurance carriers must get state approval for increases, and the carrier must alert policyholders of an increase no less than 45 days in advance. The notice you receive in the mail will detail policy adjustments you may select from to help you deal with the price increase. These alternatives may include cutting back on benefits, decreasing inflation protection, and other modifications. Be careful: If you do not respond within the required time period, the premium increase will kick in automatically.
Before taking any action or letting your policy lapse, consider these basic facts:
The cost for long-term care services will certainly continue to rise
Genworth Financial’s 2021 Cost of Care survey projects that by the year 2041, the cost of a semi-private room at a nursing home will increase from $103,843 to$ 187,552 annually. The cost of a home health aide will increase from $57,200 to $103,310. However, here in Palm Beach County, the figures already exceed those projections. Home health care can average $25 per hour – that’s $300 per day, $900 per month, and $108,000 per year. And that’s today! You can check the Genworth projections for future years and other localities here.
There is a fair chance you will need long-term care services at some point
According to the U.S. Department of Health and Human Services, 70% of today’s retirees will need some type of long-term care going forward. Women will require care for a longer period of time than men (3.7 years vs. 2.2 years). The National Academy of Social Insurance study reveals that by 2050, 15 million seniors will need long-term care, vs. 6.3 million today. Demographic trends also portend a shortage of family caregivers in future years.
If you are notified that your premiums will increase, here are some options to consider, and the pluses and minuses associated with each:
Drop the policy
Dropping the policy is a very good deal for your insurance company because it lets them off the hook for any liability. But it’s probably not a good deal for you. You should avoid dropping your policy if at all possible. As noted above, there’s a good chance you will need the coverage in the future. After all, there were good reasons you purchased the policy to begin with, and now that you are older you are even more likely to need the protection going forward. The one instance when dropping the policy might make sense is if, since the time of your original purchase, you have accumulated assets so substantial that you can self-insure.
Buy a new policy
Age and health are two big factors in premium pricing. Therefore, replacing your existing policy with a new one will certainly cost you more than the old policy, assuming you can even qualify. (There are, however, new types of policies, including hybrid policies, where premiums do remain stable. We will discuss that later in this post.)
Keep your existing policy and pay the higher premium
If you can swing it financially, pay the premium hike. Yes, it is tough to swallow paying for a service you hope you never need. But that, after all, is the concept behind every type of insurance you have. Paying out of pocket should you need long-term care would undoubtedly cost more than you would pay in premiums: writing for AARP, financial columnist Jean Chatzky notes a 2014 study that shows that 22 years of average long-term care premiums are the same dollar amount as just a five-month nursing home stay. Another point: as you calculate what you can afford, remember that you can deduct long-term care premiums from most policies from your federal taxes. Click here for more information on deductions.
Keep the policy but tweak it to keep it affordable
When your insurance carrier notifies you of a premium increase, it will also provide you with several options for rebalancing benefits that can keep your policy affordable. Here is an overview of the possibilities you may be presented with:
Reduce the benefit period
Most older policies paid out for the entirety of a person’s life. If you reduced the claim period to, say, 5 or 10 years, you might be able to keep your premiums stable.
Another possibility is reducing the total benefit amount, or the daily or weekly or monthly benefit amount. If you are married and you and your spouse have policies, you may want to adjust the benefits for one or both of you. Consider your ages and whether one of you is more likely to need long-term care services. For example, do your or your spouse have a family history of Alzheimer’s Disease? Also keep in mind the statistics that show women tend to live longer than men, and therefore are more likely to need long-term services for a longer period than their male counterparts.
Adjust the waiting period
To collect on most policies, the insured must be unable to perform two or more “activities of daily living.” Then a waiting period commences before benefits kick in. According to LifePlans, the average waiting period was 93 days. If you can extend the waiting period, you may be able to keep your premium stable or reduce the premium hike.
Adjust the inflation rider
Most policies have inflation riders, which let benefits keep up with cost of care increases. Reducing the inflation rider would not be practical for a younger person with a policy, as using benefits is likely many years off. But for an older person for whom a claim may occur sooner, dropping the inflation rider could be a good way to keep the policy affordable.
If You Are Considering Buying Long-Term Care Insurance for the First Time
Traditional or stand-alone policies are still available. However, as we stated at the outset of this blog, a new product has been introduced to the market in recent years that addresses many of the problems presented by traditional policies. This new type of long-term care policy is called a “hybrid” policy. If you have an existing life insurance policy or annuity, you may be able to “piggyback” long-term care insurance on it. Or you may be able to purchase a new policy with long-term care riders. Premiums tend to be more stable. And if you do not file a claim, a return of death benefit on the life insurance policy, or a return of premium on the annuity, may be available to you. For more information, check out our prior post here (scroll down to “Types of Policies Available”).
Figuring out what type of long-term care insurance to purchase or how to handle premium increases can be challenging and highly complex. It is wise to consult with a financial advisor with expertise in this area. Our attorneys work with financial advisors who can help. Call us at (561) 625-1100 and we can provide you with the names of individuals we know and trust who can assist you.