If you bought long-term care insurance at middle age and have moved into the golden years, you’ve probably been hit with a rate increase or perhaps are bracing for one.
Most long-term care insurance carriers have hiked rates on at least some older policies in the past decade, and the hits keep on coming:
- In Florida, MetLife is proposing long-term care insurance rate hikes of 20 to 95%, and Unum is proposing increases of up to 114% on some of its older policies. The proposals are pending before the Florida Office of Insurance Regulation.
- Four carriers — Genworth, MetLife, John Hancock and Unum — got approval to impose double-digit rate increases on older policies in Pennsylvania this year. Most of the approved rate hikes ranged from 15% to 30%. Unum got approval for four annual 13% and 18% increases, which will compound to 63% and 94% over four years.
- The federal government announced in August that rates on most of the long-term care insurance policies for federal employees and retirees would increase by an average of 83% starting Nov. 1. The Federal Long-Term Care Insurance Program is insured by John Hancock Life and Health Insurance Co.
Long-term care insurance helps pay for nonmedical care when you can’t live independently because of a disability or condition such as Alzheimer’s disease.
The rate hikes have caught many policyholders by surprise. A rate increase is never welcome news. But understanding the reasons for rate hikes and your choices can help you move forward.
Why and how this is happening
Rate hikes on existing long-term care insurance policies aren’t due to your increasing age or deteriorating health. They’re happening because insurance companies based their original prices on faulty projections.
“Most policies [subject to rate hikes] were bought eight to 15 years ago, when the premiums really were underpriced,” says Brian Gordon, president of Maga Ltd., an independent long-term care insurance agency in Riverwoods, Illinois.
Insurers assumed a certain portion of people would let their policies lapse without ever using them. But more buyers than expected held onto their policies and then — surprise! — made claims. As a result, the cost of claims is higher than insurers anticipated.
Low interest rates since the 2008 recession also hit the industry hard. Insurers make money by investing the premiums you pay. With interest rates low, investment yields are disappointing.
Insurers can’t just raise rates whenever they want. They must get approval from state insurance regulators. In some cases, regulators are approving smaller rate increases than what insurers requested. In Pennsylvania, for example, MetLife asked for rate increases ranging from 43% to 60% on some policies, but got approval in April for a 20% increase. Regulators approve increases to ensure that insurers can pay future claims.
“None of us want a rate increase, but we want to make sure the carriers remain viable,” says Rayette Law Newman, who heads policyholder services at Newman Long Term Care, an independent insurance agency in Richfield, Minnesota.
Your choices if you face a rate hike
If a letter arrives notifying you of a rate increase, take a breath. If you can afford the increase, Law Newman says, “we always recommend maintaining the policy as it is.”
Generally carriers will let you decrease the premium by reducing your coverage. (The specifics vary by insurer and by policy.) If the rate hike will wreck your budget, here are some of the ways you might be able to reduce the coverage in exchange for a lower rate increase. The choices will depend on the policy and the insurer:
- Increase the elimination period: That’s the number of days you pay for care before the policy starts paying. It functions like a deductible, so the longer the elimination period, the more you pay out of pocket.
- Decrease inflation protection: This is the percentage that your benefits increase each year to prevent inflation from eating into them. Before you choose this option, make sure you understand whether the decrease is retroactive to the day the policy was issued, or if it begins when the premium increase is scheduled to take effect, Law Newman says.
- Decrease the daily benefit amount: This is the maximum amount the policy will pay for care per day.
- Decrease the benefit period: This is the number of years the policy will pay for long-term care.
Choose carefully, because once you reduce benefits, you can’t increase them, Law Newman says.
Some carriers also offer an option to stop paying premiums and receive long-term care coverage that’s equal to the amount you’ve already paid in. So if you’ve paid $2,500 a year for 10 years on a policy, you’d have long-term care benefits equal to $25,000.
Law Newman says she generally doesn’t recommend that option because it will leave the policyholder with little coverage.
A word of caution if you think you can shop for another policy and find a better deal: A new policy will cost more because you’re older, and new policies generally are priced higher than those sold years ago.
Responding to a rate hike
There is no single solution to a rate increase that’s right for everybody, says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group in Vienna, Virginia. He recently worked with policyholders facing rate hikes in the federal government’s long-term care insurance program.
Besides the financial aspects, there are emotional considerations, he says. “Not wanting to be a burden to children — that is the underlying theme I hear from clients,” he adds. Both must be addressed before you can make an educated decision.
Walk through the choices with the agent who sold you the policy, and think through your coverage needs as you did when you purchased long-term care insurance.
It’s a kicker
“This is a kicker. It really is,” says a 78-year-old widow and retired teacher in Waldwick, New Jersey (who didn’t want her name used). She learned recently she faces an increase on her long-term care insurance policy that will amount to about $1,000 over three years. “I’m on a fixed income.”
She chose to pay the premium increase and keep her benefits as is. “I don’t want to lose any of the benefits I chose when I was 62,” she says. If she needs care, she adds, she doesn’t want to be a financial burden to her daughter and son-in-law. “They just sent their two kids to college. I don’t want them to have to pay to take care of me.”
Five years ago, Nate Narrance of Colbert, Washington, faced a 50% increase on long-term care insurance for him and his wife. The couple chose to reduce their coverage from six years of benefits apiece to three. Their combined premium rose by $100, but the change allowed them to avoid a $2,000-a-year increase. Narrance, now 79, says he’s glad they bought a lot of coverage 18 years ago so they had room to cut back on benefits and still feel comfortable.
For buyers of new long-term care policies
When you buy a long-term care insurance policy, there is no guarantee that the premium will stay the same forever. However, today’s policies are priced more accurately, says Kevin M. Lynch, a faculty instructor at the American College of Financial Services in Bryn Mawr, Pennsylvania. Insurers now have more information about the actual costs of claims, and they’ve adjusted their projections and pricing accordingly.
Yet both Gordon and Driscoll still advise clients shopping for new long-term care insurance policies to budget for future rate increases.