At a recent talk I gave, I was approached by two women with the same issue. It’s an issue that comes up more and more these days, and I thought I would give you my thoughts. The issue is what to do when you receive a substantial increase in your long-term care premium.
First, I explained to the ladies that it is not unusual for long-term care insurance companies to raise premiums. As in both of their situations, they purchased their policies a number of years ago. Both policies are particularly susceptible to rising premiums because of a number of factors. First, the insurance company underpriced those polices when they were first issued; two, not as many people have cancelled those policies as the insurance company had predicted; and three, people are living longer. The combination of those three factors, along with the low interest rate environment we have been in for more than a decade (which hurt the insurance company’s rate of return) results in many situations of substantial increase in long-term care premiums.
The first thing I told the ladies to consider is whether they need the policy or not. Like all insurance, it is need-based. When they originally purchased the policy their financial situations could be different than today. Therefore, the first issue they should explore is whether they need the policy or not.
If they need the coverage and cannot afford the increase in premium, there are some other options. Typically, when the insurance companies increase your premiums they also give you an option to continue the policy at your old premium with reduced benefits. In many situations, taking the reduced benefits is a viable solution.
Another option is to look at restructuring the current contract. For example, you may have inflation coverage that you can reduce or eliminate. This will have a positive effect on your premiums. In addition, you can also consider raising your deductible.
In a long-term care policy, your deductible is not a dollar amount; rather, it is a period of time. Typically, long-term care policies are issued with a 90-day waiting period. What that means is that if the conditions exist where you can collect on the policy, the first 90 days are not covered. An option to consider is raising this period of time from the typical 90 days to six months or even a year. Doing this, should also result in a reduced premium.
Unfortunately, what I also had to explain was that I could not give them a guarantee that a few years down the road they would not have to readdress this issue. After all, it’s not unusual for long-term care insurance companies to raise premiums every few years.
If you get a letter from your long-term care insurance carrier notifying you of an increase in premium, the key is to explore your options. Remember, your financial situation is different today than when you purchased the policy, and you have to take that into consideration. The key is to look at your own individual situation and make the best decision for yourself. What is good for your neighbor is not necessarily good for you.
After chatting with the two ladies, I told one that more likely than not, she should pay the increase in premiums and keep her current coverage. I suggested that the other woman cancel the policy, because it didn’t appear to me that she needed it. Always remember, the key to financial success is to make decisions based upon your individual situation, and only your situation.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.