That’s exactly the situation faced by one of our clients in early April.
Here’s how she handled it, and why, even after the increase, she thinks her long-term care policy is a great deal.
Why the rate hike?
We helped our client purchase long-term care insurance in 2005 from one of the nation’s premier long-term care insurance companies, and over the years she told us how the purchase gave her huge peace of mind, knowing she would be taken care of if she ever needed care.
Now, eight years later, her insurance carrier as well as others across the country have said they need to increase premiums to remain solvent and be able to pay claims long into the future.
It’s been “the perfect storm” in the insurance industry. More insured people are making long-term care claims, the cost of long-term care is increasing, insurance company earnings are down given lower interest rates, and people are just living longer than ever.
Despite the careful actuarial research and forecasts, insurance companies are paying out more on long-term care claims than they ever expected.
So we spent time with our client to review the company’s rate hike and the options now available to her, then discussed her best strategy. Here are the options given to our client and the ones you’ll face if your policy premiums increase:
Option #1: Keep the policy “as is” – pay the increased premium
Our client originally purchased a $150 per day benefit for a 3-year term. That’s a total of $164,250 of coverage. But she wisely paid for a 5% compound inflation benefit, which means her policy has now grown to cover $223 per day in benefits, or a total benefit of $244,185.
So for the same price she paid in 2005, she’s now getting almost 50% more in benefits, thanks to that inflation provision. Even with the proposed rate increase, she will be getting more for her money than she was in 2005, and her policy costs much less than a new policy would.
“While the rate increase may be a shock, the reality is that in many cases the coverage is still cheaper than it would be to buy the policy anew in today’s marketplace — which essentially means that even with the premium increase, continuing the LTC coverage can be a pretty good deal,” says financial planner Michael E. Kitces, CFP®, analyzing 5 Ways to Handle a Long-Term-Care Insurance Rate Increase in the April 2013 Journal of Financial Planning.
Option #2: Keep the premium the same and reduce the daily benefit
Another option for my client was to keep her original 2005 premium, but reduce the daily benefit from $223 to some lower amount. Planner Kitces considers this one of the least attractive options, arguing that most people’s coverage is probably already too low to meet care costs.
Here’s a tip: Check out the average cost of care in your area by visiting Genworth’s Cost of Care website. For example, in Florida (which is less expensive than other states) the median daily cost in an assisted living facility is $99, the services of a home health aide cost $116 per day, and a private room in a nursing home is $250.
Option #3: Keep the premium the same and reduce the benefit period
Our client’s policy covers long-term care for up to 3 years. Since the average insurance claim is just under 3 years, this may not be a bad place to reduce costs if you absolutely can’t afford to pay more.
If you originally bought an extended coverage period (say, five years), you could consider reducing that to three years and hope your care needs are of only average duration.
Option #4: Keep the premium the same and reduce the inflation rates
Our client’s 5% compound inflation rate is truly “the gold standard.” No surprise that the company offered to forgo any premium increase if our client would agree to reduce the inflation rate to 2.8% annually, going forward. They pointed out that over the past 9 years, long-term care costs have in fact increased fairly moderately. For example, the cost of home health care has increased only 1.3% per year on average over that period, and assisted living facilities have raised their rates only 3.4% per year.
Not a bad argument, and one older clients might agree with. However, younger clients, with a longer life expectancy ahead of them, need to weigh this one carefully. But keep in mind that your daily coverage benefit will automatically grow each year if you have any inflation rate built into your policy (and that’s a good thing).
Option #5: Cancel the policy
This is usually the worst option, unless you no longer need any long-term care coverage. Don’t assume you could go out and purchase a newer and cheaper policy. That’s rarely the case.
And the answer is ….?
After considerable thought, my client decided to keep her policy “as is” and pay the higher annual premium. As a smart consumer and active retiree, she values the peace of mind of knowing she’s fully covered, even if the cost of care keeps increasing year-after-year. She wanted to preserve her policy’s generous 5% inflation rider, and knows her policy is still a great deal compared to what’s available in the marketplace today.