Financial Consumer Alert: Long-Term Care Insurance Policies
Published Thursday, February 23, 2023 at: 8:28 AM EST
Forty percent of Americans over the age of 65 suffer from a physical or cognitive disability and the number of those requiring long term care is growing sharply. However, buying insurance that will pay for long-term care a decade or two from now involves actuarial calculations and is an area of personal finance where professional guidance can be particularly important. This is an alert about long-term care insurance (LTCI).
LTCI policyowners have been forced for many years to accept lower benefits or pay more to keep their policy’s current benefits. Even though the insurance business is regulated by state government authorities, and insurers are required under the law to request approval before changing a policyowner’s benefits or raising premium prices, most rate hike requests by insurers receive full or partial approval.
To be fair, rising health care costs and changing medical technology have made LTCI policies difficult for insurers to price. According to a study published by Milliman, the actuarial services firm, in March 2022, the average increase approved by state regulators was 29%, and price hikes ranged from 5% to more than 60%.
In addition, pricing what it will cost to pay for a policyowner’s nursing home, home-care, and other benefits 10, 20 or 30 years from now depends on complicated statistical modeling. Insurers customarily require health records to assess an individual’s risk of heart disease, dementia, cancer, and other chronic diseases before providing a policy proposal. Thus, the actuarial math involved in selling LTCI is much more complicated for insurance companies than selling a life insurance policy. Life insurance involves one risk: mortality. In contrast, long-term care insurance involves two risks – bad health as well as mortality.
In addition to price hikes, according to the Milliman report, LTCI insurance carriers also often were approved to reduce benefits on policies, lowering the maximum benefit allowed daily, shortening the length of the period benefits will be paid, lengthening the time you must wait before benefits begin, and reducing inflation protection. Only about 11% of policyholders elected a reduced benefit option; the majority accepted the price hike to keep their benefits the same.
Many LTCI companies also offer a reduced paid-up benefit, with no further premiums due, but fewer than 5% of policyholders elected this option, according to the Milliman study. Negotiating a cash buyout of an LTCI policy is an uncommon option, but it can be negotiated with some insurers, which should be a consideration if you are hit with an unexpected LTCI price hike.
For consumers, evaluating long-term care insurance policies makes it wise to get access to actuarial software tools like those used by insurers to price LTCI policies. Fortunately, there is an app for that. Using software, we can help you determine the relative value of the options that your insurance company is offering to you. If you would like to access software factoring in health, age, and other risk variables personal to you to help you price LTCI, please contact us.
Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. You should consult the appropriate financial professional regarding your specific circumstances. The material represents an assessment of financial, economic and tax law at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.
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