The cost of long term care continues to be a major issue with many people in their later years. To create a “nest egg” for retirement, only to see it disappear because of an extended long term care stay would truly be a shame. And this could certainly throw the retirement numbers off dramatically.
Often it is suggested to get serious about considering long term care coverage around the age of 50, as the premium costs start increasing dramatically after this age. Also, the longer you wait the better chance that a health issue may appear and disqualify you from any coverage.
It is unfortunate that all LTC contracts written today are labeled “guaranteed renewable”, which means the insurance company cannot single you out for health reasons and discontinue your policy. They can, however, increase their premiums, and this is normally stated in bold letters on every contract.
So you may implement your contract at age 50, but by age 75, which is probably about the time you may need the benefit, the premiums could very well have gone up several times, to the point that they may not be affordable any more.
Most long term care contracts were initiated in the 1990s and there simply has not been sufficient claims experience to define what premiums should be. Twenty years ago, companies offered single pay, or 10 pay contracts. These contracts avoid the premium increases after the scheduled pay period, because there are no more premiums to pay. Current policies normally have a premium for the entire life of the contract, so there is a much greater chance for increased premiums in the future.
Each long term care company is required to petition their state insurance commission’s regulators, in order to increase premiums. Recently those petitions requested increases by as much as 70%. That’s a bunch! Were premiums really miscalculated by that much?
If we look at health insurance premiums, we see that many years premiums increase, and sometimes by double digits. So it may be argued that if a long term care insurance company has not had increased premiums for 5-7 years that a 50-70% increase is justified. Imagine for a minute that your house payment increased in your later years by 50-70 percent.
It would be nice to say, if you implemented your plan with a 160 year old company, that has an A+ rating with A.M. Best and are New York approved (New York has the strictest requirements on insurance companies), that you would be OK. But these are some of the companies requesting the large increases.
When someone receives a notice of an increase in their long term care insurance premium, they should call their financial representative and have two proposals created. The first proposal will show the individual at his/her original age at the time the contract was issued. What would the premium be today for such a policy with all the same benefits? Probably close to 3 times the original premium. (Actually, there cannot be an apples’ to apples comparison, as some of the benefits, like lifetime benefits, and premiums paid up at 65, have been discontinued on most contracts).
The second proposal will show their current age, purchasing a new LTC policy, and the premiums would be close to 4 times higher. So, if someone intended to sustain their coverage, undoubtedly they would stay with their original contract, in spite of the increase in premium.
More than likely, the huge medical costs in the future are not going to be hospital confinements. Instead, they’re going to be assisted living, home health, and nursing home care. If a person is breathing on their own but are not immobile, they won’t be staying in a hospital.
The costs of a long term care stay remain very high, and where not everyone is a candidate for long term care insurance, considering it as part of your overall financial plan should still be an option.
Tim Schumacher, Hays, represents Strategic Financial Partners. [email protected]