Increases don’t happen overnight, and insurers need to consult the state insurance department for approval, and the state is in control of that decision. Sometimes the state agrees to the increase but with conditions, such as telling the insurer not to file a claim for a certain period. The increases are made for a class of policyholders, such as groups with common attributes such as application dates and policy type, so the insurer is not singling out policyholders who may be most at risk of using benefits.
Some policyholders are concerned that even if they continue to pay premiums, benefits may not be available when they are needed. But due to an aging population, many policyholders will naturally drop out, and insurers expect some policyholders to let their policies expire rather than agree to rate increases.Subscribe to Kiplinger’s Personal Finance
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Insurers are also finally getting some income on reserves due to higher interest rates, so they should be able to cover future claims. Even if an insurer fails, it tends to be bought out by another operator to prevent the public from losing confidence in the industry.
Long term care insurance options include reduced benefits
If premiums are increased beyond affordability, some people will choose payout (and void the policy), a paid option, or reduced benefits. Some policyholders do not evaluate their options and cancel policies without consulting an expert – this is good for insurers as they take the liability off the books.
Many insurers increase premiums over time and you have no idea if or when that might happen. You might be paying $3,000 annually for a policy for 15 years, and the insurer decides to increase your premium to $5,000. If you decide this is too expensive after 15 years and cancel the policy, you’ve already paid $45,000 to the insurer and haven’t used the benefit.
However, you should look at it like any other insurance product, as homeowners – you’re paying for the peace of mind of a big risk, even though the likelihood of a claim may be low.
Are you able or willing to self-insure?
The decision to keep your long-term care insurance or self-insurance is an issue facing many policyholders now. Canceling the policy and losing what you’ve invested over the years, or paying premiums increased and possibly having future increases, is a big financial decision. Some policyholders bought policies when they were younger and accumulated assets and found that as they got older, their nest egg grew enough that they could sustain the costs without insurance. You were insuring a risk that had been there for a while.
Keeping coverage can be very advantageous if you need it and don’t want to spend your assets to meet the costs. If leaving a certain amount of property to the heirs or your spouse is important, even if you can self-insure, you may still prefer to have the insurer share some of the responsibility.
If you can self-insure based on your long-term financial plan, the choice comes down to whether to retain the risk or share the risk with the insurer and how much coverage to keep or adjust. The goal would be to take the worst case scenario off the table if possible.
A policyholder usually has the ability to reduce policy benefits, but increasing benefits may require re-underwriting – you can always decrease coverage but not increase it. The insurance industry has mispriced products in the past, so if you were to buy the same policy today (assuming the same age as when the original purchase occurred), it would be significantly more expensive.
Customers who cannot self-insure because they don’t have enough assets accumulated can purchase an LTC policy during their early years. As time goes by, there may be a point where your assets can withstand a long-term care event – and at that point, they may terminate your policy or modify it for lesser coverage.
Even if you modify coverage, it doesn’t mean there won’t be future increases. Keep in mind that when a single person goes into LTC, your expenses can move sideways (you’ll likely sell your house and car and not travel anymore, for example), but with a couple, if one is for care and the other is not , the other spouse still has their normal living expenses, so the couple is faced with higher costs.
What are my options?
Insurance companies usually send some alternatives along with the premium increase notice, but if you are not satisfied with the options, you can request options based on what you can afford or are willing to pay. The options you are initially given are usually skewed to benefit the insurance company and often seem attractive to an inexperienced policyholder.
It is advisable to consult a licensed insurance professional before making a decision, as decreasing coverage or opting for a paid option can remove inflation adjustments, accruals or increase waiting periods. Instead of having a 90-day elimination period (when you need to cover costs before the policy takes effect), you could end up with 180 days.
If you are considering this decision as purely financial, the starting point would be to find the break-even cost of an event and how much you would have paid in premiums by that claim age. You would like to see the balance of total premiums paid against the pool of benefits available on the claim – if you end up using the benefits you will generally be better off. You’ll also want to factor in inflation and the growth rate of the funds if you had them otherwise invested by the age you claim.
You would also like to calculate what you would have saved in premiums on a side bucket at whatever age you are modeling to claim – what are you saving versus missing out on benefits?
Read the fine print
Insurers also offer hybrid long-term care products such as LTC with a life insurance benefit on death or annuity attachment, so it’s important to determine what risk you’d like to cover. Note that with these hybrid policies, the claim can substantially reduce the death benefit.
LTC insurance can turn into a sub-optimal investment at some point. The purchase decision is very individualized, and if you use it early, like in the first five to 10 years, it can be a good investment because you’ve paid less in cash premiums and you’re using the benefits.
However, the longer it takes you to use benefits, the more sense it might make to just put money aside if you can self-insure. Of course, there’s no way to know if and when an event will happen.
Please note: we are not licensed insurance agents and cannot give insurance advice, but we can help you through the process of deciding what is best for you and provide a broad overview of the advantages and disadvantages. Please discuss this with your agent before purchasing or making changes to your existing policies.
This article was written and presents the views of our contributing consultant, not the Kiplinger editorial team. You can check the consultant’s filings with the SEC (opens in new tab) or with FINRA (opens in new tab).