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It may not be something that we like to contemplate, but the vast majority of us are going to get old. And as we enter the elderly stage of our lives, most of us require some form of sustained care. The problem is that this can be hugely expensive, hence, the fact that insurance companies figured out a way to try to solve these problems. They created policies that will pay for the cost of nursing home or the cost of home health care for those with chronic or debilitating conditions.
Unfortunately, many seniors have seen premiums for long-term care insurance rise quite rapidly in recent years. And most insurers have had no qualms about vastly increasing their premiums. For example, CBS News reported in 2018 that Mass Mutual, one company that had avoided hikes, had sought approval from regulators for an eye-watering 77% price increase on its long-term care plans.
This sort of massive increase is, unfortunately, becoming the rule, not the exception. A widely publicized case involving retired schoolteacher and counselor Suzie Francis saw her premiums increase by 62% in just five years; they would have doubled had she not changed the policy term from unlimited lifetime to six years.
There is no doubt that this is a tough pill to swallow, particularly for people who have worked hard throughout their working lives, with the hope of eventually enjoying their retirement.
Suddenly what they had hoped would be a buffer against any unexpected problems is just another problem on the list.
7 Million Americans
It’s important to note that this impacts a lot of people because more than 7 million Americans now own long-term care insurance policies. Many of these people are now re-negotiating their premiums by tweaking various aspects of their policies, cutting back on the amount of benefits that the insurance policies will cover.
In other more drastic cases, some policyholders have abandoned their coverage completely which is a pretty horrible prospect. Apart from the fact that this then leaves them vulnerable, many may already have invested tens of thousands of dollars in premiums that are now defunct. And even those cutting back can find themselves exposed to the risk of unaffordable costs, which is exactly what the policies were supposed to help them avoid in the first place!
Unfortunately, this perfect storm in the insurance industry was all too predictable. Industry observers noted some years ago that insurers had widely underestimated the amount of money they would be forced to pay out in nursing home costs. This issue was then compounded by the baby boomer generation which is living longer than their parents, meaning that insurers were then required to pay out over a longer timeframe.
Insurers also made major miscalculations. They overestimated the number of consumers that would wish to cancel their policies. It’s interesting to me that cancellations are part of the pricing formula as it suggests that perhaps the customers were sold the wrong policies to begin with. Now the Insurance companies can raise premiums to encourage more cancelations. It all feels so slimy.
And, in addition to canceling policies, they also thought that many more people would stay in their homes, rather than go into third-party care, which has actually been the case. This was a double-whammy that only worsened an already ticking time bomb. Spending on long-term care increased nearly eight-fold between 1980 and 2015, from $30 billion to $225 billion, double the inflation rate. It’s not difficult to see that this situation was not sustainable.
Tackling The Problem
So, if you’re seeking long-term care help, is there anything you can do about this situation? Well, it isn’t an easy issue to tackle, but there are a few options at your disposal. One idea is to look to traditional insurance policies which tend to be cheaper. There has also been a raft of so-called hybrid policies that have appeared on the market. Hybrid policies generally provide a death benefit for a fixed amount but allow you to use that benefit to pay for long-term care expenses. Unfortunately, these hybrids are usually between two and three times more expensive than the traditional policies.
Hybrid policies can be a logical pick if your intention is to use some of your accumulated savings. If you have another life policy that has accumulated a large cash value, you can use either to make a significant premium payment. This then makes it possible to roll over an existing life insurance policy to the hybrid. However, most retirees should look out for the better deals offered by traditional policies.
Another wise move may be to ensure that you take the plunge and take out a policy ASAP. The younger that you sign up for a long-term care deal, the less current premium you will have to pay. Every year you delay this decision, the policy you choose will get more expensive. And the annual premium ramps up pretty rapidly as you approach retirement, with premiums for 65-year-olds already around 10% more than for new customers aged 64.
It’s also sensible to seek out an independent agent. This will ensure that you gain access to policies from a variety of different companies, providing you with a much greater range of choice. Experts in the field also suggest opting for an agent willing to sell long-term care partnership policies, which are part of an educational program meant to keep participating insurance professionals up to speed with all the key issues in the field.
Finally, cutting back on coverage can be an option. Many policies allow you to increase the starting period before benefits begin, shortening the length of coverage to some degree (This is known as the elimination period). Or it’s also possible to reduce certain levels of coverage such as the length of the payout term or the maximum daily coverage. Perhaps none of these solutions are ideal, but at least they’re worth considering depending on your circumstances.
The reality is that this problem isn’t going away. So, if you think you’re likely to need care in your home, help with Alzheimer’s, assisted living facilities, hospice and respite care services, and more, you’d be well advised to start thinking about how you will meet the expenses involved sooner rather than later.
United Capital Financial Advisers, LLC (“United Capital”) provides financial life management and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained herein is intended for information purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. The opinions stated herein are those of the author and not necessarily those of United Capital. Please contact your financial adviser with questions about your specific needs and circumstances. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Past performance does not guarantee future results. Opinions expressed are current as of the date of this publication and are subject to change.