How to Deal with Increasing Long Term Care Insurance Premiums

Question from listener: “My Long Term Care insurance premiums just went up by 70%! What should I do?”

Long Term Care (LTC) presents a sticky dilemma. It seems to be a responsible choice that will provide some peace of mind about your future, but it’s very expensive and comes with a learning curve.

In considering how to respond to a premium increase, step #1 is to remember why you purchased the insurance in the first place. Rather than making a knee-jerk decision in horror at the increase, go back and revisit the thought process you went through back then. Keep your LTC goals in mind as you consider your options.

What is behind long term care rate increases? Why are premium increases so large?

Insurance is regulated at the state level, and all premium increases must be approved by the state’s insurance commissioner. These commissioners may not approve premium increases on existing policies until the increases are absolutely necessary for the insurance company to remain viable and maintain their ability to pay claims. Infrequently-approved increases and undercharging due to inaccurate underwriting lead to large increases.

If you’re worried about future long tern care cost increases, visit Genworth, for a data-based state-specific prediction about what you can expect to spend.

Where can I cut long term care benefits to reduce my premium?

Here are four actions you can consider to retain LTC insurance but slow some of the acceleration of premiums.

Daily/monthly benefits. If your policy pays $5,000 a month, consider reducing it to $4,000. If your policy has been in force for several years and your original benefit has grown due to benefit-compounding riders, this could be a good first place to reduce coverage.

Benefit period. Typically, LTC policies pay for three to five years of benefits. (Lifetime benefits are practically unavailable for purchase today.)  Reducing the benefit period reduces the risk of a large claim for the insurance company, which reduces your premium.

Reduce the rate of policy growth (or inflation rider). You want your benefits to increase over time to keep up with rising costs. Policy growth rates can be compounding (5% and 3% are common rates) or tied to inflation. Reducing the growth rate of your benefits reduces the growth of your premium. Be sure to double check your state’s partnership rules before making changes to inflation riders, as an inflation growth rate is mandatory for participation in some state partnership plans.  (I explain what “Partnership” is at the end of the article)

Stop paying premiums and rely on your policy’s non-forfeiture options. Some modern policies allow you to preserve the benefits you’ve already paid for, and this non-forfeiture option can be triggered by a rate increase. Say you’ve had your policy for five years and paid $5,000 each year in premiums. Your insurance company notifies you of a premium increase at your policy’s next contract anniversary. If this triggers your state’s non-forfeiture rules, you can stop paying your premiums and keep the policy in force. In our example, your benefit would be preserved at $25,000 (5 years at $5,000 each year = $25,000 benefit). Check your original policy, as well as the notification of your rate increase, to see if non-forfeiture benefits are available to you.

Many options exist to trim your benefits to reduce your premiums. Which one is right for you? Visit with a financial planner familiar with your unique situation to give you guidance.

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Postscript: What is long term care state partnership?

Let’s use my home state of North Dakota as an example:

According to the North Dakota Insurance Commissioner’s website, “The North Dakota Long-Term Care Partnership Program is a collaboration between state government and insurance companies. Under this partnership, applicants who purchase qualifying long-term care insurance policies can access Medicaid coverage while retaining assets they would normally be required to spend on their long-term care.”

North Dakota’s policy inflation protection requirements include:

  • The policy must include the proper inflation protection.
  • If an individual was under age 61 on the date of purchase, the policy must provide compound annual inflation protection. There is no set minimum percentage level. Compound inflation protection must continue on the policy and may only end when the policy doubles, or when the insured individual reaches age 76, whichever occurs first. (Hint: using the rule of 72, a policy compounding at 5% will double in 14.4 years and a policy compounding at 3% will double in 24 years.)
  • If an individual was age 61 through 75 on the date of purchase, the policy must provide some inflation protection. There is no set minimum. Inflation protection, which can include simple interest inflation protection, must continue on the policy and may only end when the policy doubles, or when the insured individual reaches age 76, whichever occurs first;
  • If an individual was age 76 or older as of the date of purchase, no inflation protection is required.

To summarize: if you want to preserve the asset protection afforded by (some state’s) partnership programs, don’t cut your policy’s inflation protection to zero unless you are 76 years old or your policy’s original benefit base has doubled. If you are going to reduce the inflation protection on your policy, choose something greater than zero!