How to handle soaring long-term care rates
TERRY SAVAGE firstname.lastname@example.org March 19, 2012 11:58PM
Fran Levitansky and her mother, Dorothy Levitansky, are facing hugh premium rate increases for their long term care insurance. Photographed on Thursday, March 15, 2012. | Richard A. Chapman~Sun-Times
Updated: May 3, 2013 12:15PM
Fran Levitansky’s 93-year-old mother, Dorothy, purchased a long-term care insurance policy more than 25 years ago. At the time, her coverage of $90 per day seemed appropriate. But her agent never sold her inflation coverage. Over the years, CNA raised the premiums from around $3,000 per year to $6534 per year. At least they were protected from the rising cost of custodial care.
Over time, Dorothy has paid in over $95,000 in premiums. But now that Fran needs to access the policy for her mother’s care, she’s getting the run-around from CNA, which is no longer selling these policies — although it is obligated to “service” them and provide the benefits.
Fran is now wondering about her own LTC policy, purchased two years ago: “I am now having serious doubts and considering canceling my own policy, and cutting my losses at $5,500-plus. New York Life has made me lots of wonderful promises — but I see what they may be worth in 20 years.”
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What are you supposed to do when you get a 90 percent premium increase for your Long Term Care Insurance? That’s the question that faced Bob Levy and his wife, who live on a fixed income. Fran Levitansky and her 93 year old mother faced a similar decision, opting to pay rising premiums over the years.
They and many others worry that they would use up all their retirement savings on care costs — leaving nothing for a surviving spouse or children. Or even worse, that they would be forced into a state-funded Medicaid nursing home.
But huge premium increases create a big question for people trying to make sure they can afford the rising cost of custodial care, which is not covered by Medicare or supplements: Is long-term care insurance worth the cost, the fear of rising premiums, and the hassle?
As explained in Monday’s column, the insurance companies made huge mistakes in their projections of lapse rates, longevity, and policy usage. All contributed to creating losses on their insurance portfolios, made worse by the current low-rate investment environment.
Now the insurers are raising premiums across the board — in some cases as much as 90 percent. And most state insurance commissioners are powerless to stop the rates, because the insurers can demonstrate that without increases they may not be able to pay promised benefits in the future.
What to do
Some LTC insurers, such as Genworth, have asked for more modest increases averaging 18 percent — and if that’s the notice you receive, consider yourself lucky. Of course, there’s no guarantee that you won’t receive future increases — but comparable new protection would be much more expensive today. And you’re getting closer to the years in which you may need to use your policy.
The largest premium increases, such as those taken by John Hancock, which is owned by Canadian insurance giant ManuLife, are for policies that have either compound inflation benefits or lifetime protection. Those exposures offer the greatest risk to the insurance company. And of course, that is the risk that policy-buyers were trying to cover when they purchased the insurance.
In each case, according to Hancock, the policyholder can lower the inflation protection and/or the benefit period to maintain coverage, without a premium increase. It’s called a “landing spot.” And, if you accept the future reduction in inflation protection, they will build future coverage from the current level, which has already been adjusted upward for inflation if you’ve owned the policy for several years.
Brian Gordon of MAGA LTC (800-533-6242), an agency that deals solely with LTC insurance, says that one of his clients who received a 75 percent premium increase was able to maintain the current premium by reducing the inflation protection from 5 percent compounded to 2.7 percent. Her original coverage at time of purchase was $6,200 per month. But the inflation protection had already increased the benefit to $9,620 per month over the preceding years. Using this strategy, future inflation coverage would be limited from this higher base, but premiums would remain unchanged.
Industry consultant and actuary Claude Thau of Target Insurance Services (800-999-3026) says younger policy-owners might want to think twice about giving up that 5 percent compound inflation protection. Instead, they might reduce the daily benefit to avoid the premium increase. But over time, the compound inflation benefit might leave them better off if they need coverage in 25 or more years. He advises doing the math at a minimum projected 3.5 percent annual inflation rate in care costs.
Those who were smart enough to purchase LTC insurance when they were young and healthy now face some tough choices. They are likely much older and won’t be able to find new coverage, which in any case would cost more. So it comes down to paying the increase, reducing the daily benefit, reducing the number of years of coverage, or taking a lower inflation adjustment.
The insurance companies have the upper hand here. The consumer is paying the price. And it isn’t pretty. But think of the alternative. You and your family would go through a lot of money in a couple of years of custodial care. It’s a cost that isn’t covered by Medicare or supplements. And when you run out of money, the only choice is the state Medicaid nursing homes – funded by diminishing state budgets. With great respect for people who work in those facilities, they are not going to be able to attract the caregivers and create the facilities you want to live in during your final years.
So is long term care insurance a waste of money, especially at these new higher premiums? I certainly hope that you live a long, healthy,� and independent life, with a quick painless ending. But one thing is a sure bet: We will all die someday. And in between now and then, we want the best of care. And that’s The Savage Truth.
COMING THURSDAY: How to control the price risks of Long Term Care Insurance policies using life insurance and annuity combination products.
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.