Long-term Care Insurance – Important Changes

If you have ever considered the purchase of a long-term care insurance policy, you may want to get serious.  Fewer providers, increasing premium rates, and reduced benefits are changing the landscape.  For anyone in their 50’s, now is the time to make a decision.

Americans are in denial. We under-estimate our chances of needing long-term care assistance.  Statistics indicate that 70% of the population over the age of 65 will require some form of long-term care. One out of every three men over 65 years of age will spend time in a nursing home.  For women, the odds are one out of two.

Today, the average annual cost of facility care in Indianapolis is $80,000. In 30 years, that amount is expected to increase to $345,755.  Will your assets be sufficient to pay $350,000 annually for your long-term care needs?  If not, you should consider purchasing long-term care insurance.  However, policy provisions are changing and purchasing earlier rather than later, may be to your benefit. 

Premiums Increasing Under Gender Pricing

Some long-term care insurance providers have recently introduced “gender pricing” for premium rates. Since women live longer than men, they are more likely to claim benefits on their long-term care policies.  For this reason, under gender pricing, women pay more than men of the same age and health rating. In Indiana, not all providers have started gender pricing, but for those that have, premiums for women have increased as much as 40%.

Reduced Providers and Options

Long-term care polices first became available in the 1970s and by the 1990’s, there were over one hundred companies offering long-term care insurance.  Today, only a handful of quality rated providers remain.  Many of the early entrants have gone out of business due to poor pricing practices.  Other companies have maintained their existing policies, but are temporarily pulling back from selling new policies. The high cost of care and the number of claims received has created a difficult business environment for many companies and taking a time-out to make adjustments was necessary.  Fewer insurance companies in the marketplace can lead to less choice.

In addition to fewer companies selling policies, over the years, policy options have been reduced. The option to purchase a policy with “lifetime” or unlimited coverage is no longer available. Likewise, the option to have a paid-up policy after paying the premium for ten years has been eliminated.

Today’s policies provide a daily or monthly benefit amount that will be paid for a period of years. This limits the policy to a maximum benefit. For example, a policy with a monthly benefit of $6,700 for a four-year period would provide a maximum benefit amount of $321,600. Once the full benefit amount is paid on behalf of the insured, the policy terminates.  There has been discussion that some carriers might reduce their risk by further limiting the monthly benefit amount and the years of coverage available.

Cost of Inflation Protection

One of the more important provisions of a long-term care policy is the ability for the benefit to keep up with inflation. The standard policy rider for inflation protection is a 5% compound increase of the benefit.  This means the policy’s stated monthly benefit would increase by 5% each year. With a 5% rider, the monthly benefit doubles in approximately 14 years. The premium for a 5% inflation rider has increased by over 30%.

To reduce their overall exposure, in addition to increasing the premium cost of the rider, many providers are also considering the reduction of the amount of inflation protection that can be purchased, e.g. riders for 3% compound inflation or inflation protection based on the Consumer Price Index (CPI).

The Upside of Changes

Even with the premium increases and reductions of benefits, there are some advantages with today’s long-term care policies. For example, policies now allow for a home health care benefit while older policies would only pay for facility care.  Older policies may have provisions that exclude pre-existing illnesses.  Most policies sold today, do not.

Summary

With fewer insurance providers in the marketplace and the trend toward limited overall benefits, many, if not all, users of long-term care may need to pay out-of-pocket for a portion of their expenses. It is important that you plan for this contingency by investigating insurance options and understanding the impact on your financial situation if long-term care is needed.