The long-term care insurance business model is broken.
A perfect storm of overly generous benefits, decades of unusually low premiums and lifespans that are running longer than projected are putting a squeeze on insurers’ wallets — and that pain is being passed along to customers.
The question is, what can you do about it if you already have a policy and you’re being hit with skyrocketing premiums?
Overview of the LTC industry
First, let’s take a step back: What is long-term care insurance? It’s a kind of policy that pays for care in a nursing home, assisted living facility or living in your own home with a personal aide as you age.
Historically, people would buy LTC polices somewhere between the ages of 50 and 60 and they were very popular throughout the 1980s and 1990s.
However, sales are at a 25-year low today — falling from 750,000 policies sold in 2002 to only some 34,000 sold in the first half of 2017, according to the Wall Street Journal.
Since last decade, changing economic winds have put an additional hurt on LTC insurers, too. Those who became accustomed to earning 7% in the bond market on customer premiums got a big surprise during the Great Recession.
The low interest rate environment that emerged from the financial crisis of 2008-2009 forced insurers to take a 20% hit on the investments they made with your premiums.
The net result has been a big contraction of the overall industry. A marketplace that was once filled with up to 100 insurers selling LTC policies has now been whittled down to about a dozen!
John Hancock — one of the last remaining big players — pulled out of the market entirely at the end of 2016.
If you still want to buy a policy today
Though LTC policies have fallen out of favor for all the reasons mentioned above, some people will still want to buy them.
Shopping for LTC insurance today can be simplified by contacting an independent agent who can shop quotes from a variety of companies for you. The website of the American Association for Long-Term Care Insurance is a good starting point.
When shopping for LTC insurance, look for a five-year benefit with a six-month waiting period upfront before it kicks in.
Also, be sure the policy adjusts for inflation so the benefit is not subpar when you need it. Money expert Clark Howard says an inflation level somewhere as much as 5% a year should do the trick down the road.
And this one is extremely important: You only want to consider companies that have been rated A++ by A.M. Best. That means they are of the highest financial strength. Visit AMBest.com to search ratings. (Free registration is required.)
Hybrid policies are becoming popular
This new kind of policy combines LTC coverage with a potential life-insurance benefit. Unlike traditional LTC policies, hybrid policies have a death benefit and a return of premium feature if you change your mind and want to get out of the obligation.
According to The Wall Street Journal, the target market for these policies tends to be wealthier families who don’t want the financial legacy they plan to leave their heirs eaten up by rising medical costs.
Another common feature of what are sometimes called “asset-based long-term-care policies” is a guarantee that premium rates won’t increase. That’s the kind of peace of mind many families would like to enjoy.
Industry trade group LIMRA reports that 260,000 hybrid policies were sold last year vs. 66,000 traditional LTC policies sold in 2017.
Consider this when facing higher premiums on an existing policy
The sad truth is that premiums are always on the rise with traditional LTC policies. Consider the following before just rolling over and paying an increased premium:
Try lowering your benefits
Some policies will let you pay your current premium in exchange for lower benefits even after a rate hike is in effect. Areas you might consider trimming are inflation protection and the benefit term. But you must balance those considerations against the possibility that you’ll pay more out of pocket if you do wind up needing LTC for a long time.
Shop the market
Though the LTC market has thinned out, it pays to at least look around and see if there’s a cheaper option out there for you. That is, if you think you can pass underwriting.
Swallow the bitter pill
If you won’t be able to put food on the table because of premium increases, you may have to consider letting the policy lapse. If you do that, you’re left with either self-insuring or going the Medicaid route.
Yet note this well when considering the latter option: Even though you may be able to live independently, you could be forced into a nursing home environment prematurely because that’s all Medicaid will cover. (This may vary by state; check with yours for final word.)
Read more: Clark’s LTC insurance Honor Roll