Long Term Care Insurance Companies raise rates up to 186%.
Perhaps you are one of the thousands of policy holders of a long-term care insurance policy that received a letter from your insurance company recently giving you a choice between a buy-out, a reduction in benefits, or a very high premium increase? Believe me, it was a seismic ripple across the US in the last few weeks. At first, I thought it was just Genworth, but then I received a call from a client with a John Hancock policy. The sad truth is that most long-term care companies are worried about the future cost of long-term care as much as we are!
In order to survive and meet the demands of policies already written, these companies have been granted huge increases in almost every state just to honor existing policies. States know that if these increases are not approved by the regulatory agencies, the long-term care insurance company may be unable to meet demands, be forced to reorganize as a company, or go bankrupt. Some of these increases have been as high as 189%! So just when someone in their mid 80’s may need care, they are hit with a premium increase that, in my client’s case, is now costing her about $12,000 a year. One couple in their 70’s was told their combined premium would be over $23,000a year within 3 years. This is unsustainable for many older people! In fact, there are multiple class action lawsuits against Genworth in almost every state due to these unprecedented increases.
How did this happen?
When the long-term care insurance industry got started in the 1970’s, there wasn’t a history of what claims would look like. Companies had been selling life insurance for hundreds of years and they had literally centuries of data telling them how many people can be expected to die in a given year, what the ages of those people are likely to be, and how many people would cancel these policies.
The long-term care industry could only go by what life insurance and disability insurance used for a model. The percentage of people who drop their policies at some point is called the “lapse rate”. Almost all insurers came up with an assumption that each year, somewhere between 4% and 6% of policyholders would drop their policies. But they were totally wrong!
The Perfect Storm
Not only have insurance companies underestimated how quickly costs would rise, (forcing them to pay more than they expected when claims are submitted), they wildly underestimated the lapse rates. While as many as 95% of life insurance buyers cancel their policies before they die, most LTC policy holders never drop their coverage. As a result, insurance companies are paying far more in LTC benefits than they predicted.
Combine all that with low interest rates, (low growth on invested premiums) and it’s easy to see why many insurers are raising rates while others are simply quitting the business altogether. Many companies have stopped offering individual traditional policies all together, but a few good companies remain.
What does this mean for YOU?
People are not dropping their policies because they NEED the coverage! We are all living longer and the likelihood of needing LTC is increasing. What is your plan to pay for long term care? Will you be part of the 70% of those over 65 years of age who will need some kind of long-term care? The numbers are daunting. The average cost of a private room in a nursing home exceeds $100,000 a year. The cost of a home health aide averages more than $60,000. Medicare doesn’t cover long-term-care expenses, so many Americans are on their own to fund their care.
New LTC Options
The insurance companies are coming up with many new options called Hybrid Plans that have many advantages over the traditional model. They are usually a combination long term care/life insurance that will pay the life benefit to an estate if never used but offer 2-3 times the value of the life policy for long term care. Yes, they cost more upfront, but most of the top plans are guaranteeing more than the premiums back to their beneficiaries if they never need care and there are no rate increases. You can also look into an annuity with a long-term care component. For those who simply cannot pay a larger lump sum into a hybrid, (though some allow for installment payments now), consider a starting an HSA or Health Savings Account that is tax free. If you think you may need Medicaid, don’t procrastinate; go see a qualified elder law attorney now to get the facts.
Don’t Cancel!
Whatever you do, don’t cancel your traditional long term care policy without seeking professional advice, and educating yourself on your options. Remember, even at $12,000 a year, ONE MONTH in a private room in skilled care can easily exceed this! Look at all your options, make a plan, and give yourself some peace of mind that you are prepared for the future.
Star Bradbury
Senior Living Strategies
Author: Successfully Navigating Your Parents’ Senior Years
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