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How to Deal with a Rate Increase on Your Long-Term Care Insurance Policy

September 23, 2016 at 12:00 AM

Many of you are asking me what to do when you receive a rate increase on your long-term care insurance policy. You know my advice for years has been to not buy long-term care insurance unless you can afford a 50% rate increase in your lifetime. I never thought I would be discussing a 126% rate increase which is how much some Federal LTC Insurance Program (FLTCIP) policyholders are facing, with an average of 83%. The Federal program policyholders have to make a decision by September 30th so that’s why I’m writing this blog now.

How could this happen? This decision was based on four main things:

  1. Actual claims experience – the most recent claims study said women who need LTC longer than a year need an average of 4.7 years of care, whereas men need only 3.8 years. The “country-club” assisted living facilities have made this longer. People live longer when they are happy!
  2. The demographic reality that people are living longer, and the longer people live, the more likely they are to file a claim. 
  3. Low lapse rate which means most people don’t cancel their policies, even when they get rate increases.
  4. The low interest rate environment we are in has reduced present and future investment income on the money held in reserve to pay claims.
John Hancock, the carrier behind the Federal program, believes the new rates will be enough to pay future claims and doesn’t anticipate another rate increase but they aren’t going to guarantee that of course.

Now, everyone who got a rate increase got a letter to lower the benefits to either take a smaller rate increase (still over 50%) or take no rate increase and keep the premium the same. There’s also an option to let the policy go and receive benefits equal to the premium you have paid in if you ever need LTC. 

So I turned to Phyllis Shelton, my go-to person for long-term care insurance for what she thinks you should do. She said for sure not to let the policy go. Here is what she is telling people to do about any rate increase, not just the Federal program:

Depending on your age and how long you think you will live based on your family history and overall health, figure out how much benefit you will need in the future. Then figure out how much premium you will pay if you accept the rate increase over the next 20 or 30 years. Add that to what you have already paid, and compare the total premium to what the benefits will be at that same point. She says the premium is usually about 10% of the future benefits and to not forget that you get to stop paying your premium when you start receiving benefits. If you look at lowering your benefits, she says to compare the premium savings with the future benefits you will lose.

“That’s the only way they can make an informed decision, Suze.” I asked her for an example, and after reading it, it sounds like one of my “Can you afford it?” shows!

  • “Nancy” is 64 years old and has many family members who live to their mid-90s, but no Alzheimer’s in her family history. 
  • She lives in Austin, TX and a “country-club” assisted living facility costs about $6,000 a month today. At 5% compound inflation, it will cost about $20,000 a month in 25 years. Nursing home care will cost more, so it would be good if her insurance policy could pay for a nice assisted living facility and a lot of home care. Then she could use her savings to pay the difference if she needs nursing home care as a last resort.
  • Her current benefits are $220.50 a day ($6,700 a month) and a 5 year benefit period which gives her a benefit pool today of $402,412, and 5% compound inflation which will grow her benefits in 25 years to $22,700 a month and a benefit pool of $1.3 million.
  • Her current premium is $323 a month and is increasing to $536 a month, a 66% rate increase, which she is adamant she can’t afford.
  • Based on the new rate, she will wind up paying $165,000 in total premium in 25 years vs. $1.3 million in benefits at that time.
  • The letter gave her an option to reduce her inflation from 5% to 3% and keep her premium the same.
  • The 3% compound inflation means her benefit will grow to $14,000 in 25 years, a huge shortfall for the nice assisted living facility which will cost about $20,000 at that time.
  • She is smart and knows she doesn’t have to accept just what the letter said, so she asked for the premium to keep her 5% inflation but reduce her benefit period from five years to three years. That premium is $308 a month, even lower than her current premium. This is the one she is thinking about.
  • This option will save her $228 a month [new premium $536-$308], which is $68,400 over 25 years, but she will lose $545,500 in benefits [monthly benefit in 25 years $22,700 x 3 years = $817,200 vs. $1,362,710 for 5 years]
  • RESULT: She is accepting the rate increase, especially because she now understands she will always have the option to reduce from 5 years to 3 years if she gets another rate increase.

Don’t want to go through all that? Here’s the short version:

  1. Compare the premium you have already paid plus the premium you will pay if you accept the rate increase to the benefits you will have at age 85. Use this compound inflation calculator. 
  2. If you aren’t satisfied with the difference, take the second option offered to you.

Still need help? Phyllis has agreed to help you as a personal favor to me.

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