Finance

Planning for Long Term Care

The changing nature of long term care insurance

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The long term care insurance picture has changed since the financial crisis and, judging by my clients, the changes have not been welcome.

“It’s outrageous, totally outrageous. How can they do that?” my 82-year- old client, Grace, ranted at a recent meeting. “I mean they are going to raise my rates 18%. I want to drop my policy.” As she spoke, her two adult daughters looked at me imploringly.

“Absolutely not,” I said. “You are at the age where it is more and more likely that you could use the benefits of the policy. You need to keep it. Besides, even with the increase, your annual premium remains affordable.”

Grace wasn’t mollified, so I tried another tactic. I role-played the insurance company asking the state insurance commissioner for permission to raise rates. “Look,” I (the insurance company) said, “I know 18% seems high, but we have a couple of problems here we never anticipated. Many more policy holders are keeping their policies longer than we anticipated. We were counting on a lapse rate of between 5% and 10% and we only have seen 1% to 3%. That means we are paying out far more claims than we counted on. And the ultra-low interest rate environment is hurting us too. We can’t invest the premiums to generate sufficient profits to cover our claims. So we have to raise rates on our older policies. As we see it, they have been underpriced all along.”

While Grace wasn’t happy with my enactment, she understood what she was up against and agreed to keep paying the premiums. Her daughters were much relieved. Although they were more than willing to help Grace, it could become a financial burden.

Keeping existing policies, even with rising rates, makes sense for most of my clients. Many of the policies purchased over the last ten years have generous benefits and are still affordable. But what about those who are thinking of purchasing policies now? Do they still make sense?

Long term care is expensive, as anyone who has a relative in a nursing home knows. And insurance providers are struggling with the profitability of this niche. Some carriers have dropped out of the business entirely. Others are cutting back on benefit periods and the maximum inflation coverage. Still others are eliminating lifetime or limited pay options. It is uncertain whether these benefits will come back once interest rates rise and insurance companies become more profitable again. Even with cutbacks in coverage, however, premiums are increasing on new policies, bringing prices above what many people are willing to pay.

Hybrid long-term care policies present an alternative; they can be considered a way to partially self-insure, however, they too have drawbacks. Hybrids, also known as asset based insurance coverage, add long term care riders to either life insurance or annuities. In the life insurance version there are a number of guarantees including a return of the initial premium, if claims aren’t made, and maximum charges for the cost of the benefits. For some annuity policies the underwriting has been simplified making more individuals eligible. Hybrids do, however, require a sizeable upfront lump sum payment, which limits the policies to those individuals with extra savings or idle balances within existing life insurance or annuity policies.

As a financial planner, I believe everyone needs a good long term care plan. Some of my clients can self-insure, mentally setting aside a bucket of investments to cover anticipated costs, or designating a second property as something they would sell to pay for in-home or other forms of custodial care. Other clients plan on moving in with their kids, using the proceeds from the sale of their primary residence to cover expenses if long term care needs should eat into their reserves. And a few clients are willing to spend down their assets and go on Medicaid, assuming they have provided for their spouse or dependents in other ways. That still leaves a sizeable group of clients struggling with the question of whether or not to buy insurance.

An important long term care issue is the well-being of the survivors. Often there is enough money to pay for the cost of care for the person in need, but not enough to maintain the desired lifestyle for the surviving spouse. Children or grandchildren should also be considered. Long term care insurance protects assets that could go to them as well. Still, the decision to buy long term care insurance is not an easy one. More restrictive benefits and higher premiums are likely here to stay. That means the tradeoffs - costs and complexities - need to be carefully considered before a purchase is made.

Betsey Purinton, CFP® is Managing Director and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at bpurinton@strategicpoint.com.