How did long-term care insurance become what it is today?
Long-term care insurance became popular in the 1990s. As baby boomers watched their parents struggle through their final years, they were appalled by the cost of care and the loss of control they experienced when Mom and Dad were no longer able to dress, bathe, or feed themselves.
In Western culture, institutional care is the norm. In other parts of the world, a full-circle reversal of roles is expected and accepted when elders can no longer look after themselves. In the United States, adult children caring daily for aging parents is the exception — and often the last resort.
Cultural differences aside, here in the West, we are at a disadvantage when it comes to accurately predicting cash-flow needs in retirement. The cost of either our own long-term care needs or that of our parents presents a moving target and a major unknown in the context of retirement needs.
It’s easy to understand the strong demand for an insurance policy offering protection from this unpredictable future burden. Such products were especially appealing when they first became available over 30 years ago.
Why are premiums going up?
We didn’t know it in the 1990s, but there was a problem. Insurance companies grossly underestimated the volume and duration of long-term care insurance claims. The premiums they charged were not nearly high enough. More importantly, the number of policyholders who would choose to cancel or “drop” their policies in the future (also known as the “lapse rate”) was badly overestimated.
Also unaccounted for was the sustained low-interest-rate environment we’ve experienced for well over a decade now. Insurance companies keep their reserves in low-risk bond portfolios, and those returns have not kept pace with the claims experience.
Too much liability and not enough revenue means that most insurance companies have either stopped offering new policies or petitioned the states for rate increases. Others have exited the long-term care insurance business altogether.
When insurers petition state insurance commissioners to raise rates, they argue that the move is in policyholders’ best interests because, without the increase, the insurance safety net would collapse. That leaves the burden on either the state or the policyholders. Genworth, the largest traditional long-term care insurance provider, has already successfully raised rates in most states.
What should I do if I receive a notice in the mail?
Depending on the state you live in, most policyholders are notified that their premiums will increase with their next bill (typically by 30-40%) or that the increase will be phased in over several years. Some policyholders are given the option to continue paying what they’ve been paying all along if they’re willing to accept less in benefits.
Those benefit reductions come in three forms:
- Lower Inflation Rider Rates – This means that your “benefit pool” will cease to grow by 3% or 5% and perhaps only grow at 1%. This isn’t a big deal if you need benefits tomorrow, but it makes a huge difference if you need them in 20-30 years.
- Longer Elimination Periods – This means that if you qualify for benefits, the insurer will take longer to start reimbursing for costs. The longer the elimination period, the longer you’re “on your own.”
- Lower Overall Daily or Monthly Benefit Amount – This simply lowers the limit on the amount you can be reimbursed for care.
It’s unfortunate that these decisions need to be made in the first place, but it is nice to have options. Consider these four things when this unwanted mail arrives:
- How is your health today? Have you had a stroke? Are you following a similar path to a parent who wound up needing care? If so, we would encourage you to pay the increased premium, if you are able, to retain your benefits at current levels.
- Has your financial situation changed? The stock market has been a friend to many over the last decade. Have assets increased to a level that would allow you to “self-insure” should a long-term care event occur? Is coverage still needed?
- What about your spouse? Are they on the policy also (joint)? If so, they may share benefits. The odds of one of you needing benefits at some point are higher than many realize.
- Have you become a widow or widower? The biggest concern for most is leaving a spouse destitute after a lengthy long-term care event. If one spouse has passed away, there may no longer be a dependent spouse who will need the assets. Aside from leaving a legacy to children or other heirs, you may not have as much incentive to insulate your assets from a nursing home as you once did.
Nobody likes it when a company fails to follow through on a commitment. However, once you get past the anger and frustration, remember this: You want to own the type of insurance that is making the insurer suffer, not the one they’re making a killing on. Because that’s when the odds tilt in your favor, a rare circumstance in the world of insurance.