By Steven Joshua Samuel JD, MBA, AIF®
Significant changes are occurring in the long-term care insurance (LTC) industry, according to a recent Barron’s article. Insurance companies are adjusting to mistakes they have made in the past few decades in setting insurance premium levels. Premiums are based on estimates of how many people will buy insurance, how many people drop policies after a few years or keep them for many years, and how many claims will be made and what those claims will cost the companies.
More people than expected are keeping their LTC insurance policies because they are placing higher value on them — knowing they likely are living longer and will be able to make more claims at higher expenses than expected. Insurance companies are making adjustments by increasing premiums for some existing policy holders as well as changing new offerings of LTC insurance. Here are five facts you need to know:
- Many insurance companies no longer offer LTC insurance and are raising premiums for older policies
About 10 years ago, as many as 100 companies offered LTC insurance, according to the American Association of Long-Term Care Insurance. MetLife, Prudential, Allianz and many others no longer offer new policies. These and other companies that abandoned the business are required to honor the polices they sold, but they are permitted to request permission of state insurance departments to raise premiums. Barron’s reported on April 11, 2015 that premium increases, which were approved in 2014, range from MetLife’s 20.5 percent on some older polices in New Jersey, to Allianz’s 75 percent on some older polices in Texas. As a rule, company requests for premium increases are not automatically granted by state insurance departments. Genworth’s request to increase some older polices in Massachusetts has been denied, and in protest, the company announced it will not offer new policies in Massachusetts until it negotiates a compromise on the issue.
- Several large insurance companies still offer coverage
John Hancock, Mutual of Omaha, MassMutual, Transamerica and Genworth continue to offer LTC insurance to residents in most states. The need for coverage remains as well, with national costs for long-term care rising and now averaging $91,250 per year for a private room in a nursing home. However, costs can be lower in some states and as high as $175,000 per year in San Francisco and New England. For most people, remaining at home with help is the preferred choice. Services for a home health aide averages $ 45,760 per year nationwide, according to a Genworth survey cited in Barron’s. And in the Boston and New York metropolitan areas, it is close to $30 per hour. Unfortunately, to cope with increased claims, the companies that still offer coverage require higher premiums for some of the more valuable policy benefits, such as annual increases in the daily amount the insurance pays. Some companies offer only 3 percent rather than the previous 5 percent annual increase in daily benefits. All companies make this a more expensive choice.
- LTC insurance still makes sense for people with $500k or more in assets
People with low income and little or no savings are not likely to be able to afford LTC coverage. They can qualify for Medicaid, though in many states Medicaid pays for nursing home costs and does not pay for care at home. Being able to be cared for in your own home requires either paying with your own money or having a LTC insurance policy to pay for all or some of the care. Jeffrey Brown, professor of finance at the University of Illinois, supports the view of many financial professionals, saying in Barron’s, ” Long-term care is exactly the kind of low probability, high-cost risk that you want to insure against.” He points out that families having $500,000 or more in assets who pay for decades of care for an Alzheimer’s patient would leave a healthy spouse in a catastrophic situation, unable to meet his or her basic needs after burning through all the family assets. Affordable coverage is available to supplement family assets to mitigate these types of losses.
- Many families can still purchase affordable, traditional LTC insurance by carefully designing policy benefits and getting quotes from more than one company
Age, health status and benefit choices determine the cost of LTC insurance. The age bracket of 50 to 60 is the sweet spot for purchasing a policy that is affordable. Purchase sooner and you’ll pay for a decade of coverage you don’t likely need at a time when money may be better applied to more pressing matters. Apply later, premiums will be higher and there is a greater possibly of poor health affecting the premium. A policy at age 65 will be about a 50 percent higher premium than at 55.
Most LTC policies have four issues that require choices that influence premium: 1. Daily benefit, which is the amount per day the company will pay; 2. Term of the policy, meaning for how many days will the company pay the daily benefit; 3. Elimination period, which is a deductible in the form of how many days you pay for your own care before the company begins to pay; and, 4. Inflation protection, which increases the daily benefit each year by a specific amount or percentage. Choosing a daily benefit of $150 for three years would create a pool of $164,000 to pay for care before your family needs to use its own money. Adding an inflation adjustment of 3 percent per year to the $150 daily amount after 20 years increases the available money to $325,000. Help from a trusted financial professional is useful in determining what amount of premium a family can afford and what levels of benefits are worth the cost. Premiums for policies with similar coverage can vary widely so it is worth obtaining quotes from at least two or three insurance companies.
- Newer, innovative LTC insurance policies
Recently, insurance companies have begun to offer polices that address consumer concerns about affordability. Shared policies for couples are becoming popular. For example, these polices at approximately a 15 percent more premium than single polices allow spouses to share the benefit years, equally or unequally. Six years of total coverage could be used all at once for one spouse, equally, or four years for one and two for the other. Newer policies combine life insurance with long-term care benefits. For example, universal life insurance policies are available with riders that allow 2 percent of the death benefit to cover long-term care needs until the death benefit is exhausted, so that a $500,000 policy will pay $10,000 monthly for about four years. For families that can afford large single premium insurance policies of $100,00 or more, the policy provides long-term care benefits as a multiple of three or more times the death benefit, paid monthly if long-term care is needed.
Most families with someone in need of long-term care want to keep their loved one at home for as long as possible. Though LTC insurance is becoming more expensive and the policies more complex, insurance is the only source of paying the cost of care at home besides family assets, in most states. If you are interested in looking into LTC coverage, be sure to consult a trusted professional who has specific and extensive experience in this area.
Samuel Financial LLC is located at 858 Washington Street, Dedham, MA 02026 and can be reached at 781.461.6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. Fixed Insurance products and services offered through CES Insurance Agency.
May 2015