Don’t drop long-term care when rates rise
Terry Savage email@example.com August 24, 2011 4:02PM
How you can pick Terry’s brain
In this column, I’ll respond to your most frequently asked questions regularly. Of course, you always can submit individual questions on my Sun-Times blog, reached on the home page at www.TerrySavage.com.
Updated: May 3, 2013 12:15PM
The question below is specific, but it represents some of the many questions I have received from people who are being notified that their long-term care insurance premiums are being increased — just at the time they can least afford it. I’ll explain some of the alternatives.
Q. My insurance company just notified me of a steep increase in my long-term care insurance policy premiums. I have a
four-year long-term care policy with a six-month premium of $859.12. I just got a rate increase that would be $944.96. My daily coverage is for $155 in a nursing home and $116 for in-home care.
One option is to reduce the daily rate for a nursing home to $141.05, and that would bring my premium to $859.95 for six months. My other option is to go from a four-year policy to a two-year policy with present daily rates for a premium of $729.30. I am 77 years old now and still working. I do plan on retiring soon and then I will be short on cash. Which option would you recommend — or should I just drop the policy altogether? It’s been in place for approximately 10 years.
A. Although most LTC policies were sold with the “assumption” of level premiums, the insurance companies are within their rights to ask state regulators for permission to raise premiums for an entire class of policyholders. And they’ve been doing just that.
Sadly, you are being penalized for the insurance company’s miscalculations about longevity and use of policy benefits. Another part of the problem is that fewer policies are being sold than had been projected, resulting in a smaller pool of premium dollars. Also, investment returns on invested premiums have declined.
Of course, the publicity from these premium increases only scares more people away from purchasing this important coverage — making future policies even more expensive! It is a devastating cycle — and it comes just as it is apparent that without coverage many aging boomers will be forced into state Medicaid-funded nursing homes at a time when states have less money available to provide care.
You — and many others — are faced with some tough choices. First, please do not cancel your policy. I hope you never need it! But if you do need some form of “custodial care” — help with the basic activities of daily living — you’ll be glad you have access to either care at home or in a private facility. Once in a private facility, there is a greater chance they’ll accept Medicaid if your coverage runs out. And even a smaller benefit amount may give you that access, supplemented by your Social Security check.
Murray Gordon of MagaLTC.com, (800) 533-6242, one of the largest independent agencies for long-term care insurance, calculated the trade-offs involved in your choices:
†Paying the higher premiums and keeping current benefits intact.
†Reducing the daily benefit.
†Shortening the current four-year coverage to two or three years.
We agree the best choice is to keep paying the higher premium. But assuming you can’t afford to do that, there are both mathematical and subjective conditions to this decision.
If you take the lower daily benefit, the overall maximum value of your policy will be reduced from $226,300 (four years at $155/day) to $205,860 (four years at $141.50). If, instead you reduce the policy to two years of coverage at the current levels, your maximum benefit will fall to $113,150.
But the decision also has to be based on your personal situation. Is there longevity in the family — or Alzheimer’s or Parkinson’s or other conditions that could lead to a need for a longer period of care? If so, beware of shortening the coverage period to two years. A new policy now is not an option because of your age.
It’s always tough to think about long-term care. But I think it’s tempting fate to ignore the potential need. And that’s The Savage Truth.
Terry Savage is a registered investment adviser