Recently John Hancock raised premiums on many of its existing long term care insurance (LTCI) policies in force with increases ranging from approximately 20 percent to 90 percent. These were primarily focused on policies written over five years ago. This comes on the heels of Prudential and Berkshire both exiting the LTCI market over the past year. Insurance companies making less on their reserves in this low interest rate environment, fewer policy owners letting their policies lapse than expected and inadequate premium pricing in the past have all contributed to the flux in this marketplace.
All of this has made it even more difficult for people to protect against the financial risk of needing long term care. What can you do to protect yourself? Here are some tips:
- For financial planning projections, you should make the assumption that LTCI premiums will go up with inflation over time if you currently hold or are purchasing a LTCI policy. Given the flux of the long term care insurance market and the fact that premiums will be variable over time, I suspect it will be a while before the insurance companies become effective at adequately pricing out the risk and underlying premiums needed to support this type of insurance
- If you are one of those individuals who have insurance and received a significant price hike, I would caution you against dropping the policy altogether without thorough consideration. If you can’t afford the increase in premiums, the insurance company may allow you to reduce your benefits to keep premiums at affordable levels. It may not be ideal, but you still have some level of protection. Even with the premium hikes, many currently held policies still look attractive compared to what you can purchase new on the open market today.
- There are many riders and options available in the insurance marketplace to address long term care needs. There are a new slew of hybrid life insurance products which provide long term care benefits if needed. Traditional LTCI can have riders that protect against inflation and pay back the premium if no claims are ever made. There are options where the LTCI buyer can fully pay off their premiums in several payments in the early stages of owning the policy. These provisions all protect against the current flux of the LTCI market and are very attractive to someone shopping for LTCI. However I would be careful as everything that reduces risk comes with a cost. Insurance companies do a very good job of profiting on areas where the consumer has a heighted level of fear so I would weigh out whether the benefit is worth the cost.
- Many people are resistant to buying long term care insurance because they may never use it. For those who fall in this camp, just keep in mind that most of us go for years without ever having a claim on their homeowners insurance. Somehow we continue to pay premiums on this type of insurance.
- In the end, I still continue to think shopping for this insurance in your early 50’s is the ideal time to consider this, buying a policy that covers the average daily cost in a nursing home care in the area you intend to live with a 5 percent compound inflation rider with a three to five year period is the best baseline place to start as far as shopping for a LTCI policy. From there you can adjust accordingly to meet your personal circumstances
- Finally, determine if LTCI is right for you. This type of insurance tends to be a perfect fit for those who have the financial means to pay the premiums over the long haul, but not enough in financial resources to absorb a long term care need. In some cases, people who can both afford the premiums and a long term care need buy it to increase their chances of leaving a legacy to their heirs. But LTCI is not universally the best fit for everyone.
When addressing my client’s retirement planning needs, the financial risk of needing long term care is always a built-in assumption within my planning work. The state of the LTCI marketplace certainly isn’t making things any easier. But I urge that everyone should consider this risk and whether LTCI fits your needs regardless if you do this yourself or have professional guidance with your financial affairs.
Jeff Bogue is an independent, fee-only financial planner with his firm, Bogue Asset Management LLC, serving individuals, families and small business owners nationwide since 1997 with offices in Wells and Portland, Maine. Jeff has been a Certified Financial Planning Practitioner since 1997 and has been quoted on personal financial matters in the Wall Street Journal, Consumer Reports, Consumer Reports Money Advisor, Kiplinger’s Personal Finance, Businessweek.com, Bankrate.com The Portland Press Herald, AARP Magazine, Registered Rep.com, Fidelity Stages Magazine, AOL Money & Finance, MSN/CNBC.com, Investment Advisor Magazine, Financial Planning Magazine and Financial Advisor Magazine. He is an active member of the National Association of Personal Financial Advisors, the Financial Planning Association and the Maine Estate Planning Council.