Difficulty in long-term care insurance: continue to pay or give up?

Long-term care insurance companies are restructuring and have sent policyholders letters about adjustments to coverage, premium increases, or paid options. Many policyholders are wondering how to react and what options they have.

Increases do not happen overnight and insurance carriers must consult with their state insurance department for approval, and the state has control of that decision. Sometimes the state agrees to the increase, but with conditions such as: B. Asking the insurance company not to come back with an application for a certain period of time. Increases are made for a class of policyholders, e.g. B. Groups with common attributes such as application dates and policy type, so that the insurance company does not single out policyholders who may be at higher risk of using benefits.

Some policyholders worry that even if they continue to pay premiums, benefits may not be available when they are needed. But of course, due to the aging population, some policyholders will default, and insurance companies are hoping that some policyholders will let their policies expire instead of agreeing to rate increases.

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Insurance companies are also finally getting some return on reserves due to higher interest rates, so they should be able to cover future claims. Even when an insurance carrier fails, another carrier usually buys it out to keep the public from losing confidence in the industry.

Long-term care insurance options include reduced benefits

When premiums are increased beyond affordability, some people elect to pay out (and forfeit the policy), a paid option, or reduced benefits. Some policyholders don’t evaluate their options and end contracts without consulting an expert – this is good for insurance companies as they get liability off the books.

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Many insurance companies increase premiums over time and you have no idea if or when they will. You may be paying $3,000 annually for a 15-year policy and the insurance company decides to increase your premium to $5,000. If after 15 years you decide it’s too expensive and cancel the policy, you’ve already paid the insurance company $45,000 and haven’t used the benefit.

However, you should think of this like any other insurance product, e.g. B. Homeowners – You are paying for a big risk even though the probability of damage may be small.

Can or do you want to insure yourself?

The decision to keep long-term care insurance or to insure yourself is now a reality for many insured persons. Whether you cancel the policy and lose what you’ve paid in over the years, or pay the increased premiums and potentially have future increases is a big financial decision. Some policyholders bought policies when they were younger and accumulated wealth, only to find that with age their nest egg has grown enough to allow them to pay the costs without the insurance. You have insured a risk that has existed for a while.

Maintaining coverage can be very beneficial when you ultimately need it and don’t want to spend your assets to cover the costs. If it is important to leave a certain amount of assets to the heirs or your spouse, you may prefer the insurance company to assume some of the liability, even if you can insure yourself.

If your long-term financial plan allows you to afford to insure yourself, the choice boils down to whether you want to keep the risk or share it with the insurance company and what level of coverage to keep or adjust. The goal would be to take the worst-case scenario off the table if possible.

A policyholder normally has the option to adjust insurance benefits downwards, but an increase in benefits may require a new underwriting – you can always decrease coverage, but not increase it. The insurance industry has mispriced products in the past. So if you bought the same policy today (assuming the same age as when you originally bought it), it would be significantly more expensive.

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Customers who cannot afford to insure themselves because they do not have enough accumulated assets may be able to purchase an LTC policy in their earlier years. Over time, there may come a point where their assets can support a long-term care event — and at that point they can cancel their policy or change it for less coverage.

Even changing coverage doesn’t mean there won’t be future increases. Remember, if a single person enrolls in long-term care insurance, their expenses can move sideways (for example, you’ll likely sell your house and car and stop traveling) but for a couple, if one enrolls in long-term care and the other doesn’t , the other spouse continues to have their usual living expenses, leaving the couple with increased expenses.

What are my options?

Insurance companies usually send some alternatives along with the notice of a premium increase, but if you’re not happy with the options, you can ask for options based on what you can afford or want to pay. The options you are initially given are usually geared towards the benefit of the insurance company and often look enticing to an inexperienced policyholder.

It’s wise to check with a licensed insurance professional before making a decision, as reducing coverage or agreeing to a paid option can eliminate inflation adjustments, riders, or longer waits. Instead of a 90-day cut-off period (if you need to cover costs before the policy kicks in), you can end up with 180 days.

If you view this decision as purely financial, you should first determine the break-even cost of an event and determine how much you would have paid in premiums up until that qualifying age. You want to see the breakeven of total premiums paid versus the benefit pool available for the claim – if you end up using the benefits, you’re usually better off. You should also consider inflation and the growth rate of funds if you would have invested them elsewhere by the age at which you claim.

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You would also want to calculate what you would have saved in premiums in a side bucket at whatever age you modeled making a claim – what are you saving compared to the losses in benefits?

Read the fine print

Insurance companies also offer hybrid grooming products, such as B. LTC with a life insurance death benefit or an annuity bond, so it’s important to determine what risk you want to cover. Note that with these hybrid policies, continuation of the entitlement could significantly reduce the death benefit.

LTC insurance can eventually become a less than ideal investment. The purchase decision is very individual and can be a good investment if you use it early, for example in the first five to ten years, because you have paid fewer premiums upfront and are taking advantage of the benefits.

However, the longer it takes you to start using the benefits, the more sensible it can be to simply put money aside if you can afford to insure yourself. Of course, there is no way of knowing if and when an event will take place.

Note: We are not licensed insurance agents and cannot provide insurance advice, but can help you decide what is best for you and provide a full overview of the pros and cons. Please discuss this with your agent before purchasing or making any changes to your existing policies.

This article was written by and represents our contributing consultant, not the Kiplinger editorial board. You can review advisor filings with the SEC (opens in new tab) or with FINRA (opens in new tab).