Following nearly two decades of flat premiums, holders of long-term care insurance policies are being faced with premium increases of 10-35% or more. One company recently petitioned the State of Oregon to raise its rates on existing policies by 114%, but the Insurance Commission denied it, reducing the increase to 35%. Why is this happening, and what can you do about it?
The why part is easy, and perhaps a very good reason to own a long-term care policy. In the mid-1990s, companies competed for market share, so they priced their premiums and issued policies without much actuarial data or claims experience. Then a funny thing happened—people actually needed long term care, and the companies realized just how expensive it was. This happened at the same time the low interest rates hurt the income on their bond portfolios. Numerous companies have exited the market by selling their book of business to the surviving companies. Those that remain must raise premiums to provide benefits to their existing policy holders.
What can you do about it?
Most carriers will offer ways to modify your benefits and lower your cost. These include:
- Removing or reducing the cost of living adjustment (COLA)
- Lowering the monthly benefit
- Lengthening the eliminating period
- Shortening the benefit period.
Most contracts with COLA features had either a 3% or a 5% annual compound feature from the start. These were typically indemnity policies that paid the contractual daily amount once you started needing care, not the actual cost. Thus, if your policy was issued 15 years ago for a $100 per day with a 5% COLA, that $100 daily benefit would now be worth $208 per day, or $6,240 per month, regardless of whether or not your actual expenses were less. In my opinion, cutting the COLA benefit is likely the last cut you should make to reduce premium costs.
It’s also often the first choice an insurance carrier will give you because in the long run, it’s usually the most expensive for them. If you select this option you also run the risk of having your now current $208 daily benefit cited above reset back to the original $100! If you are relatively young and healthy, and if the company will permit it, you might be better off resetting the new daily benefit to a slightly lower amount and let the COLA work its magic in the years ahead.
Perhaps the most effective way to reduce premium costs is to shorten the benefit period. We now have 20 years’ worth of actuarial data upon which to make a decision. According to longtermcare.gov, the vast majority of in-home and in-facility care services were for less than four years.
The good news about all of this is that long-term care policies no longer cover just nursing home stays. The insurance companies have learned that it is much cheaper to pay someone to come to your home on a regular basis than it is to put you in a long-term care facility. You wouldn’t cancel your homeowners or auto insurance upon receiving a premium increase notice, so we think that your long-term care coverage also deserves careful review. Therefore, if you get a premium um notice, consult with your financial advisor or the agent who sold you the policy to review your alternatives.