Why Are Long-Term Care Insurance Premiums Skyrocketing?
Many individuals that have long-term care insurance policies are beginning to receive letters in the mail notifying them that that their insurance premiums are going up by 50%, 70%, or more in some cases. This is after many of the same policyholders have experienced similar size premium increases just a few years ago. In this article I’m going to explain:
Why this is happening
Are these premium increases going to continue?
Options for managing the cost of these policies
If you cancel the policy, alternative solutions for managing the financial risk of a LTC event
Premium Increases & Insolvency
Unfortunately, it’s not just the current premium increases that are presenting LTC policyholders with these difficult decisions. Within the letters, some of these insurance carriers are threatening that if they’re not able to raise premiums by 250% within the next 6 years, that the insurance company may not have enough assets to pay the promised benefit. What good is an insurance policy if there’s no insurance company to pay the benefit? I won’t mention any of the insurance companies by name but here is some of the word for word statements in those letters:
“This represents a 69% rate increase in the premiums for your policy.”
“A.M. Best has downgraded its rating of (NAME OF INSURANCE COMPANY) financial strength to C++ in September 2019, indicating A.M. Best’s view that (NAME OF INSURANE COMPANY) has marginal ability to meet its ongoing insurance obligations.”
“Please be aware that as of 06/06/21 over the next 3-6 years we are planning to seek additional rate increases of up to 250% for lifetime benefits”
This creates a very difficult decision for the policyholder to either:
Keep the policy and pay the higher premiums
Cancel the policy
Make adjustments to the current policy to make it more affordable in the short-term
These Policies Are Not Cheap
In most cases, these long-term care insurance premiums were not cheap to begin with. Prior to these premium increases, it was not uncommon for a robust policy in New York to cost between $2,500-$4,000 per year, per person. LTC policies tend to carry a higher cost because they have a higher probability of paying out when compared to other types of insurance policies. For example, with life insurance, they expect you to pay your premiums, you live a long happy life, and the insurance policy never pays out. Compare this to the risk of a long-term event, where in 2021 HealthView Services produced a study that stated:
“An Average healthy 65-year-old couple living to their projected actuarial longevity has a 75% chance that one partner will require a significant level of long term care. There is a 25% probability that both partners will need long-term care” (source: Think Advisor)
Couple that with the fact that long-term care expenses are very high and insurance companies have to charge more in premiums to balance the dollars in versus dollars out.
With these premium increases now in play, some retired couples are faced with a situation where they previously may have been paying $5,000 per year for both policies and they find out their premiums are going up by 70%, increasing that annual cost to $8,500 per year.
Affordability Issue
So what happens when a retired couple, on a fixed amount of income, gets one of these letters, and realizes they can’t afford the premium increase. They essentially have two options:
Cancel the policy
Make amendments to the policy (if the insurance company allows)
Let’s start off by looking at the amendment option. Many insurance companies, in exchange for a lower premium increase, may allow you to reduce the benefits offered by the policy to make it more affordable. You may have options like
Extending the elimination period
Reducing inflation riders
Reducing the daily benefit
Reducing the maximum lifetime benefit
Reducing home care options
These are just some of the adjustments that could be made, but remember, you are taking what you have now, and watering it down to make it more affordable. Caution, at some point you have to ask yourself:
“If I reduce the benefits of this policy, will it provide me enough coverage to meet my financial needs should I have a long-term event?”
If the answer is “No”, then you may have to look more closely at the option of canceling the policy. But what happens if you cancel the policy and you are now exposed to the financial risk of a long-term care event? Answer, you will have to identify another financial strategy to manage that risk. Two of the most common that we have implemented for clients are
Self-insuring
Setting up Medicaid trusts
Self-Insuring Alternative
The way this solution works is you are essentially setting money aside for yourself, acting as your own insurance company, should a long-term care event arise later in life, you will have money set aside to pay those expenses. If you were previously paying an insurance company $4,000 per year for your LTC policy, then cancel the policy, you would set up a separate investment account where you continue to deposit the amount of the premium payments that you were previously making each year so there will be a pool of assets to draw from should a long-term event arise.
But, you have to run projections to determine how much money is estimated to be in those accounts at future ages to make sure it is sufficient to cover enough of those costs that it won’t put you in a tough financial situation later on. There is an upside benefit to this strategy that if you never have a long-term care event, there are assets sitting there that your beneficiaries could inherit. If instead that money was going toward long-term care insurance premiums and there’s not a long-term care event, all that money has essentially been wasted. However, this strategy does take more planning because your self-insurance strategy may be not cover the same dollar for dollar amount that your LTC policy would have covered if a long-term care event arises.
Medicaid trust
Understanding how Medicaid trusts works is a whole article in itself and we have a video dedicated just to this topic. But the general idea behind the strategy is this, if you have a long-term event and you do not have a LTC insurance policy, you essentially have to spend through all of your countable assets to pay for your care. Note, the annual costs of assisted living or a nursing home is often $100,000+ per year. For those that do not have assets, Medicaid will often pay for the cost of assisted-living or nursing home care. By setting up a trust and placing your assets in a trust ahead of time, if those assets are owned by the trust for a specific number of years, if there is a long-term care event, you do not have to spend those assets down, and Medicaid picks up the tab for your care. Like I said, there’s a lot more detail regarding the strategy and if you’d like to know more watch this video:
Medicaid Trust Video: https://www.youtube.com/watch?v=iBVQtrGiUso
Future Premium Increases
You also have to include in your analysis the risk of future premium increases which seem likely. These letters from the insurance companies themselves state that they may have to increase premiums by a lot more just to stay in business. So it’s not just evaluating the current premium increase in these situations but also considering what decisions you could face within the next 5 – 10 years if the premiums double again. This variable can definitely influence the decisions that you are making now.
Why Are These Premium Increases Happening?
This is a 20 year problem in the making. For decades insurance companies have miscalculated how long people were going to live and the rising cost of long-term care. Since they weren’t charging enough at the onset of these policies, they have not collected enough in insurance premiums to cover the insurance claims that are now being filed by policyholders. Thus, the policyholders that currently have policies are now being required to pay more to make up for those underwriting mistakes.
The second issue is that there is less competition in the long term care insurance market. Insurance companies in general do not want to issue policies in a sector of the market where the probability of a payout is high and the dollar amount of the payout is also high; they want to operate in sectors of the market where the probability of a payout is low so they get to just keep your premium payments. Many insurance companies have completely exited the Long Term Care Insurance market. For example, in New York state, there are only two insurance companies remaining that are issuing traditional long-term care policies. Less competition, higher prices.
The third issue is due to the dramatic rise in the annual premium amounts, they have become less affordable for new policyholders. Many retirees can’t afford to pay $4,000+ per year for each spouse’s LTC policy so the issuance of new policies is dropping; that again, saddles the current policy holders with the premium increases.
A Difficult Decision
For all of these reasons, if you are currently a holder of a LTC insurance policy, instead of just blindly paying the higher premiums, it really makes sense to evaluate your options with the anticipation that the premiums may continue to increase in the future. For those that decide to amend their policy to reduce the cost, you really have to evaluate if the policy covers enough going forward to make it worth continuing on with the policy. I strongly recommend seeking professional help with this decision. Professionals in the industry can help you evaluate your options because these decisions can be irreversible and the right solution will vary individual by individual.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
