Evaluating the Benefits of Long Term Care Insurance

Article in Summary:

  • The cost of nursing home care is near $400/day in some parts of the country.
  • A long-term care insurance policy can be a useful risk-management tool, but they’re not for everyone.
  • It pays to research your insurers history of rate increases

As the cost of nursing home care approaches $400/day in some parts of the country, more attention is being given to the concept of insuring against the need to pay for long-term care. Some employers offer long-term care (LTC) insurance as an employee benefit. A recent premium hike by the nation’s second-largest provider (John Hancock) of LTC insurance has raised a lot of eyebrows.

A long-term care insurance policy can provide protection against the risk of having to spend substantial amounts of money for home health care, an assisted-living facility, or care in a nursing home.  LTC claims can typically be made when the insured person is unable to carry out certain “activities of daily living;” this includes things like eating, dressing, bathing, toileting, and transferring from bed to chair.  Although policy premiums may exceed $2000/year for buyers in their 50s, a policyholder who eventually collects can easily receive benefits well in excess of the cumulative value of the premiums paid.

One attractive feature of LTC policies is that the premiums are determined by a person’s age and health at the time of enrollment. Usually the premium cannot be raised on an individual basis.  This is important: without this feature, an insurer could target premium hikes against people whose health has declined.  However, insurers can raise premiums on an entire class of policyholders at one time, and this is what Hancock has done.  Earlier this year, the company announced that it would be raising the premiums on most policies sold prior to 2009 by 40%, a number that stunned policyholders and insurance advisers alike.

As insurance contracts go, LTC policies are a relatively new idea – the first LTC policy was written in 1987, and John Hancock began offering policies that same year.
The statistical assumptions underlying LTC coverage are not as well-established as those used for life insurance and other types of insurance, so insurers continue to have to examine the claims that they have to pay out and adjust their premiums accordingly.  In 2007, Hancock reviewed its policies and established a 13% increase on premiums for a number of policies sold between 1991 and 2003.  Given that increase, the magnitude of the most recent increase was a real surprise.

One of the things that insurers consider when they set policy prices is the question of whether policyholders will continue to pay premiums until they can collect.  A certain percentage of the time, people buy an insurance policy for a few years and then drop their coverage.  These premiums are essentially free money for the insurer, since those individuals will never receive benefits.  It’s possible that Hancock overestimated the number of policyholders who would drop their policies and that the increases are in response to that realization.

There is another possibility, though.  Often, individuals buying LTC insurance through an employer are given “guaranteed issue” policies if they purchase the coverage within a specified time window – this means that they can’t be refused coverage.  It may be that Hancock has determined that there is a larger-than-expected number of individuals covered under its group LTC policies who have health problems.  If these policyholders had sought coverage under private policies, they would have been charged higher premiums or might even have been refused coverage.  Such persons are more likely to collect on the policies and more likely to hang on to their coverage because they expect to need it.

According to an article in the National Underwriter, John Hancock has found that its LTC policy claims levels have doubled since its 2006-2007 review, and its policyholders have lived longer than expected – meaning that an unexpected number have reached an age where they are likely to need long-term care.

Some policyholders may not be able to afford the increased cost.  Hancock will offer these folks the opportunity to reduce their benefits to levels with affordable premiums, but it means that they will have less coverage than they originally planned for.

All things considered, it’s better for an insurer to increase its premiums and keep its policies in force than to keep premiums low and go out of business.  But the magnitude of the John Hancock increase will likely cause buyers of coverage to look more closely at the differences between Hancock and other providers of LTC insurance.  Insurance companies that write few group policies, for example, are more likely to have examined the health of most of their policyholders closely; they’re therefore less likely to need to make significant premium increases.

A long-term care insurance policy can be a useful risk-management tool, but they’re not for everyone.  If you’re shopping for a policy, it pays to ask about the insurer’s history of rate increases and to make sure that you are dealing with a company that has a strong financial position.

About the author

Thomas Fisher, CFP®

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