Long-term care insurance (LTCI) companies paid out a record $13.25 billion in 2022 to policyholders with traditional policies, according to the American Association for Long-Term Care Insurance. About 345,000 policyholders received those benefits while they were getting skilled care either at home or in a long-term care facility.
What happens when a client receives an unwelcome notice that their LTCI premium is going up? It’s not unusual these days for premiums to rise 25%, 50% or even 75%.
The client may be tempted to give up their policy, but It’s clear that long-term care insurance is important to peace of mind and financial well-being. If someone thinks they can drop their current policy and find one at a lower cost, they will be in for a big surprise when they see the cost of the new policies on the market.
The long-term care industry has undergone radical change over the past couple of decades. Insurance companies found out they weren’t charging large enough premiums, and because the lapse rate was much lower than they expected, the cost of care was higher. Today, fewer carriers are in the marketplace, meaning less competition and higher premiums.
Historically, low interest rates meant that the carriers weren’t getting the ROI they needed to pay claims. So they have been requesting rate increases from their state regulators, and the regulators — knowing that claims won’t be paid unless rates are raised — have granted the increases.
Of course, the cost of long-term care — whether in a nursing home or at home — isn’t getting going down, either. Today, a semi-private room in a private nursing facility can cost well over $100,000 per year. A home health aide, depending on the hours needed, could be $60,000 or more annually.
How can you advise someone who is facing a big LTCI rate increase but doesn’t want to drop their policy completely? Fortunately, there are some good choices to reduce the cost of premiums. How much one can save depends on state regulations and the carrier, but here are some of the options.
Remove inflation protection
Inflation protection is a good idea if your client can afford the sizeable rate increases that come with it. But if it’s a choice between dropping the policy or dropping inflation protection, advise them to go with the latter.
Freezing the benefit can be risky because it may not cover the entire cost of a nursing home stay. However, you can look at the LTCI policy as a supplement to the client’s other assets to pay for long-term care (for example, their monthly Social Security benefit and available retirement funds). The LTC benefit is better than nothing.
Not all insurance companies will allow a person to freeze benefits, so people need to be careful when they make the change. If an individual or family member notices a person’s health getting worse, they may not want to lower the benefits.
Reduce the benefit period or total benefit
We have helped clients hold down their premiums by reducing the benefit period. A 2017 Rand study estimated that older adults who spent any time in a nursing home stayed just under eight months on average. For 90% of those studied, the total was less than three years. So it’s unlikely today’s 65-year-old will need 20 years of benefits. Most people die before exhausting their benefits.
You can also look at who will need care longer, or who is at risk of developing a cognitive disorder, such as Alzheimer’s disease. Keep in mind that women live longer than men; a husband might reduce his benefit period to three years while a wife keeps hers at five.
Consider a hybrid policy
Many people we work with today are looking into policies that incorporate life insurance and a LTC rider or an annuity with a LTC rider. These policies are referred to as hybrid or asset-based long-term care plans.
Typically, the life insurance’s death benefit is tapped first to pay for long-term care; once the death benefit is exhausted, the long-term care portion of the policy kicks in.
Unlike traditional long-term care insurance, hybrid policies have more flexible benefits, and beneficiaries get their money back for any partial or unused benefits. Best of all, the premiums are fixed for life and can be paid as one lump sum or over five to 20 years. Some hybrid plans allow a person to pay a lifetime premium payment that will never increase.
Consider a buyout if it’s offered
It doesn’t happen often, but we do have one carrier that is offering a large buyout for some policies. If people do take the buyout, they will need to pay taxes on anything over the premiums that were paid. The cash can then be set aside for long-term care needs.
Two more points: Be sure to remind your clients of the tax advantages of long-term care insurance. Premiums are deductible as a medical expense for the purposes of federal income tax, and benefits are tax-free up to $420 a day as of 2023. But if a person has a policy with higher benefits and higher expenses, they will not have any tax consequences.
In the future, there will be new kinds of stand-alone policies and hybrid plans that will make the industry even more competitive.
Finally, your client’s personal risk tolerance plays an important role in these considerations. Someone who is risk-averse will likely take the rate increase and make budget cuts elsewhere.
Brian Gordon, CLTC, is president of Gordon Associates Long Term Care Planning (www.GALTCI.com) in Bannockburn, Ill. He can be reached at Brian@galtci.com.
