In some ways, long-term-care insurance is like auto insurance. We pay a premium and hope we never need to file a claim. If we have to file a claim against our auto insurance, it means our car was damaged or stolen, or somebody was hurt in an accident. If we have to file a claim against our long-term-care insurance, it means we’ve lost the ability to take care of ourselves in some way. Our auto insurance will help pay to fix our car or pay someone’s medical bill. Our long-term-care insurance will help pay for someone or some facility to take care of us.
That’s the way insurance works. We pay a premium and the insurance company steps in to pay for losses we can’t afford. For most of the insurance policies we own (or should own), it’s not unusual for our premiums to increase over time. Of course, we know if we are in an at-fault accident our auto insurance premiums will jump dramatically. But if we don’t make any claims, we typically see modest increases, somewhat in line with what we would expect with inflation.
But it doesn’t work that way with long-term-care insurance premiums. Over the years, if you’ve owned a long-term care policy, you’ve seen premium increases every few years, often as much as 40% to 60% each time. In fact, last year, the federal government announced that the long-term-care insurance premiums for federal employees and retirees would increase an average of 83%. In other words, the cost of protecting yourself against a future claim that may or may not occur would almost double! (For related reading, see: Taking the Surprise out of Long-Term Care.)
The Long-Term Care Double Whammy for Insurance Companies
Before we discuss how you might control your premium increases, let’s go over why we’ve seen such large increases. I’m not one to feel sorry for insurance companies, but when it comes to long-term care, the insurance companies face a double whammy. First, we are all living longer, which means we may need our policies to pay for a longer period. And health insurance costs are also increasing. So the insurance company has to pay higher claims for longer periods of time—not a successful business model. It’s been so bad for so long that many companies in the long-term-care business have stopped selling policies.
How to Control Your Insurance Costs
So the insurance company can raise your premium or it can stop selling policies. But what choices do you have? While you do have a few options, none of them is great. We’ll discuss those now. (For related reading, see: Long Term Care Insurance: Can It Be Affordable?)
First, you can dig a little deeper into your pocket and pay the premium increase. If you like the coverage in your existing policy and you can afford the increase, this may be a good choice for you. This is also your best choice if you do not want to self-insure the risk of needing long-term care at some point.
On the other end of the spectrum, you could just not pay the premium and let your policy lapse. This is a tough call. If you let your policy lapse, you will effectively be self-insuring against the risk. Maybe you can afford to do so. Maybe not. Would you qualify for Medicaid? It’s important to know because Medicare provides only limited coverage for nursing home or custodial care.
You could shop around for a policy with another company. Unfortunately, as I mentioned earlier, there just aren’t many companies selling long-term-care policies any longer. So this might not be a good option.
Your Long-Term Care Insurance Policy Options
The option we see used most often is to reduce the benefits in your policy. A long-term care policy includes many features and options including:
- The benefit period: This is the length of time the policy will pay benefits and is typically three to seven years, although some early policies provide for an unlimited benefit period.
- The amount of coverage: This is typically quoted as a daily or monthly amount (e.g., $150/day or $4,500/month).
- The inflation protection: This is designed to make sure the amount of coverage in your policy keeps up with inflation. There are two types of inflation protection: simple and compound. The compound feature results in higher coverage and, therefore, higher premiums.
- The elimination period: This is basically your deductible. It is the number of days you must pay for care before the policy kicks in and starts paying.
These are not all the features and options of a policy, but they are the major ones. They’re also the ones you can typically adjust to reduce the premium. For example, if you have an unlimited benefit period, you could reduce it to a three- or five-year coverage period, which would result in less risk to the insurance company and a lower premium to you. Another adjustment that we see often, and one that my wife and I have used for our policy, is to change from compound to simple inflation protection.
Please keep in mind that these are just examples of ways that you can manage the premium increases that have become all too frequent for many. Before making any changes to your policy, you should consider your situation carefully. Determining the best way for you to protect you and your family from the costs of long-term care can be complicated. We recommend meeting with a professional who can help you clarify and understand your options.
(For more from this author, see: When Does the Benefit of a Trust Outweigh the Cost?)