A Long-Term Care Insurance Shock

Being single, with grown children out west a long distance away, she said, “ I did ‘the right thing’ and bought long-term care insurance.” The purchase in 2000 was from a company no longer in business. The policy is being serviced by another carrier.

 If you own long-term care (LTC) insurance, a company cannot raise your individual premium. They can petition state regulators for an increase for all policy holders within a class. This is happening with greater frequency, especially for older policies. The lady saw two previous premium increases, 8% and 5%. Imagine the shock when she received notice that her premium was going up by 76.37%, from $2,626 per year to $4,632!

Companies that were early to the game in offering LTC policies underestimated the future costs of health care. They also assumed a certain “lapse rate”; people would pay for awhile and drop the policy without going on claim. That didn’t happen as people retained  coverage in the face of soaring costs. Excessive claims plus low interest rates and declines in real estate values and stocks following the 2008 crash impacted investment portfolio earnings and company reserves. The upshot is a spate of premium increases, especially on older policies.

In our lady’s case, the big driver behind the premium jump was an annual 5% compounded increase in the benefit base. The company stated she could avoid the premium increase by reducing the future annual inflation rate increases. The company wants to shift the bulk of the inflation risk to the policy holder. Whether or not that is wise in her case is a function of  holistic financial analysis. How much future risk can she assume versus an additional premium outlay of $2,006 per year, with no guarantee that future premium increases are not in the offing?

 Rising health care costs are pressuring companies to change pricing in other ways. Many carriers price policies by age and not gender. Couples discounts are common. One major carrier has received state approvals to raise rates for single females, and other companies are likely to follow suit. Notes W. Allen Johnson at iTrust Advisors, a nationwide insurance general agency, “The rates for women are expected to be 20% to 40% higher with gender-based pricing.”

Are there alternatives? Long-term care costs are a major risk to retirement security and financial independence. Do you retain the risk or outsource some or all of it to an insurance carrier? That’s a function of your cash flow producing net worth and other sources of income such as Social Security or a pension plan. Could you handle catastrophic care-giving costs and not leave a surviving spouse impoverished? A financial advisor can help to frame current caregiver costs, weigh various assumptions as to inflation and your current health status, and relate that to your cost of living, portfolio horsepower or lack thereof, and sources of care-giving resources. Medicare, which is not cheap nor free, does not cover long-term care expenses and many other routine medical costs.

Are there alternatives to LTC insurance? We are seeing an increase in “linked products,” life insurance and annuity contracts that offer long-term care riders or chronic illness benefits. You may elect to self-insure some or all of the risk via other investments and inflation hedges. Repositioning lower yielding investments into higher yielding alternatives may produce sufficient cash flow to cover the increase or the entire premium.

As the baby boomer tsunami washes up on the shore of retirement, individuals are living longer while demanding more care in the face of growing doctor and medical facility shortages, spurring price pressures. Carriers are tightening underwriting standards and one should apply while healthy. One in five applicants currently are rejected and declines increase significantly after age 50.

Long-term care and the challenges of aging, health care, and special needs should be part of a comprehensive financial planning analysis. As we age, your adult children should be included in the discussion, particularly those who might have to step in on your behalf.

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150, Peachtree Corners, GA 30092 ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com