How to Cope With Big Rate Hikes on Long-Term Care Policies

Editor’s Note: Reprinted by permission of retirementrevised.

If you have long-term care insurance, brace for the possibility of a steep increase in premiums this year. Some of the largest long-term care (LTC) underwriters are asking state regulators for large increases on some policies this year.

The current ultra-low interest rate environment is a key reason for the rate hikes. Low rates have cut sharply into the investment earnings that insurance companies depend upon to fund benefit payouts. Investment returns fund up to 60 percent of the funds used to pay benefits, according to the American Association for Long Term Care Insurance (AALTCI). 

Another factor is the rising longevity of policyholders, and their tendency to hang on to their policies. Insurers expect a certain percentage of customers to drop their policies before they ever draw benefits and that's not happening in the case of LTC policies.

Investment News magazine reported recently that rate hikes are being sought by Prudential Insurance Company of America, Met Life Inc. and John Hancock Life and Health Insurance Co. The increase requests -- which won't cover all of the companies' policies -- range from 18 percent to 25 percent.

Notably, Hancock plans to raise premiums by up to 25 percent on policies held by up to 140,000 federal employees under age 65, according to the trade publication. MetLife -- the only insurance company to respond to my inquiries -- said it initiated the rate hikes in 2008, and has received approval from 41 states, with most of the increases set at 18 percent. In most cases, no rate increases have been put through for policyholders who were age 70 or older at the time the policies were sold.

LTC coverage can help protect you and your family from the potentially ruinous cost of care. The Urban Institute estimates that 25 percent of people over 65 will need help for an extended period of time with some aspect of basic personal care -- bathing, eating, getting in or out of bed or dressing. The average annual rate for a home health aide is $27,000, and the average semi-private nursing home rates are $72,270 per year, according to the Metlife Mature Market Institute.

If you do have LTC coverage and find yourself facing a big rate hike, here are some key questions to ask as you consider how to respond.

• Should I drop my coverage? Probably not, especially if you bought your policy years ago. Your premium almost certainly is much lower than you'd get on a new policy today at an older age even with a steep rate hike thrown in.
   
• Is the policy still right for me? "Start with a review of why you bought the policy in the first place," says Joel Larsen of Navion Financial Advisors. "Does it still make sense? Remember, you're not just looking at long-term care insurance. You're also planning the what, where, when and how of care delivery. While the expense and funding is certainly important, it's what that expense does for you that matters."
   
• Has the policy value increased? About 40 percent of LTC policies have compound inflation riders that boost the value of daily benefits and total dollars available to policyholders. If you have that kind of coverage, assess the current value of the policy's benefits. An inflation-rider policy bought in 1998 by a couple aged 55 and 49, respectively, with an inflation rider and a $100 daily benefit would have a $171 daily benefit now; total pooled benefit dollars available to the policyholder would have jumped from $109,500 to $187,000, according to AALTCI. By 2018, when the husband hits age 75, the benefits would be $278 and $320,000, respectively.
   
• Can I save money by changing the coverage level? If you just can't afford the rate hike, cutting back the coverage always is an option -- and it's better than canceling the policy altogether. Cut back either the daily benefit or the period benefits are paid. "I'd look for ways to reduce the premium while maintaining the same daily benefit, such as increasing the elimination period," says Jon Beyrer, a Certified Financial Planner (CFP) with Blankinship and Foster.