Taking the Long View on Long-Term Care Insurance

When the famous Dutch physician and chemist Hermann Boerhaave died in 1738, he left behind a sealed book entitled The Onliest and Deepest Secrets of the Medical Art. The book was auctioned for a vast quantity of gold. When the new owner broke the seal, he was surprised to find that 99 of its 100 pages were blank. Only the title page bore a handwritten note from the author: “Keep your head cool, your feet warm, and you’ll make the best doctor poor.”

One of our clients recently got hit with a 77% increase in his long-term care insurance (LTCI). If he could have been comfortable with Dr. Boerhaave’s prescription, he would have immediately canceled his LTCI.

LTCI has been in the news a lot recently because some insurers have imposed high premium increases on existing and new policies, and other companies are withdrawing from the LTCI market.

What’s goin’ on?

Why is this happening today? In a word: profit. Insurance companies mispriced LTCI when they began selling substantial amounts of it 10-15 years ago. They overestimated how many policyholders would let their policies lapse; they underestimated the increases in long-term care costs; and they overestimated their investment rate of return due to continued low interest rates. Now, they are trying to fix their mistakes.

Should I stay or should I go?

What should you do if you own an LTCI policy and are facing a large premium increase? (Consult your financial advisor, of course!) You can pay the additional premium or take a look at the components of your policy and make adjustments. LTC insurers will allow you to decrease your coverage (and therefore reduce your premiums). LTCI policies consist of four principal components (daily benefit, benefit period, inflation protection, and elimination period), and the premium is affected by the amount of coverage you have for each component.

Those who do not have LTCI policies now are questioning the financial wisdom of making a purchase. They are worried about fast-rising premiums down the road, and/or they are worried their insurer will cancel their policy.

Premiums for existing LTCI policyholders can increase, but insurers must receive approval from the state insurance commissioner. If the commissioner determines the policyholder is among a group of enrollees whose premium is “inadequate,” the commissioner approves the increase.

Bringing it all back home

Is LTCI still a viable option? LTCI is relatively new, and it is generally believed that it takes 20-30 years of data for actuaries to properly price an insurance product. Moreover, LTCI continues to evolve, and insurers are developing hybrid LTCI-life insurance products that might be a good fit.

Some analysts argue that there will be few premium increases on new policies. Because actuaries have more data on lapse rates, long-term care inflation, claims rates, and the low-interest environment, they should be better able to price LTCI.

Although many insurers have exited the LTCI market, they are continuing to service existing policyholders. It is unlikely that a policyholder’s insurance will be canceled.

The bottom line is that LTCI is a viable, if expensive, option. Whether it is right for you depends upon your situation. If you would like to find out more about how LTCI fits into your overall financial plan, please contact us.

By Mark Stinson  |  CPA, CFP®, MBA