Eighty million Baby Boomers are headed for the retirement exits and many will face a significant rise in medical costs during their retirement years. Your choices include self-insuring these potential expenses or hedging your bets by purchasing long-term care insurance. We had one case where both the husband and wife required around-the-clock nursing care at an annual tab of $200,000. As you might imagine, this level of expense could quickly devastate one’s personal finances. Many people choose to buy insurance to help cover these risks. Long-term care insurance is a type of disability income policy whereby the contract states that if you are unable to perform two of the six activities of daily living, the insurance company will cover medical costs up to a stated amount per day for a given period of time. The six activities of daily living include eating, bathing, dressing, mobility, grooming, and toileting/continence. For example, you decide to purchase a $150 per day benefit payable for five years using a 90-day waiting period. If due to an accident or illness you couldn’t walk and bath yourself, after ninety days, the insurance company would reimburse your medical expenses up to $150 per day for up to five years for a total potential benefit of $273,750.
The history of long-term care insurance dates back to the 1970’s but did not become popular until the 1990’s. Since then millions of consumers have purchased this product and the insurance companies now have decades of experience in handling claims. The results have not been pretty. The insurance companies have woefully underestimated both the rising cost of healthcare as well as volume of claims. In 2010, fifteen insurance companies accounted for 85%-90% of the business written for LTC policies. Last year they took in an estimated $11 billion in premiums against an estimated $70 billion in liabilities. Several years of historically low interest rates have decimated insurance company investment returns, further exacerbating these insurance companies’ problems. As a result many insurance companies are either getting out of this business or scaling back sales of LTC policies including Lincoln Benefit Life, Metlife, Inc., Prudential Financial Inc., Unum Group, CNO Financial Group Inc. and John Hancock Life Insurance Company.
If you own a LTC policy, what does all of this mean to you?
· First, you’ll probably want to keep it. If you were to drop your policy, it’s highly unlikely you could now purchase one with the same benefits and premium. A new policy would likely be more restrictive with a much higher premium.
· Second, expect your premiums to rise. The insurance companies are taking a financial beating on these products. Unfortunately for consumers, in most policies, the insurance companies have the right to raise premiums but only with the permission of the state insurance commissioners. While it’s been frustrating for policy owners to get notices of rising premiums, it’s my opinion that premiums are rising much slower than claims…meaning the policies still represent a good deal for the consumer. It appears that the state commissioners are becoming increasing uncomfortable with continuing to allow insurance companies to raise premiums on seniors.
In a world where it’s estimated that two-thirds of seniors will eventually meet the LTC insurance company test of being unable to perform two of the six activities of daily living, paying for healthcare for the onslaught of the Baby Boomer generation will be an escalating problem. If you are age fifty or older, consider your options for handling this financial issue. If you already own LTC coverage, consider yourself lucky and think long and hard before deciding to drop the coverage. A lot of people have purchased LTC insurance through their employer. If you leave that employment, you’ll want to strongly consider taking that policy with you.
“Today the insurance companies have shifted focus to hybrid policies that offer life insurance with a LTC rider whereby if you qualify for LTC benefits, those benefits will be paid as a deduction against the death benefit. If you never use LTC benefits, the full amount of death benefit is paid at your death”, says Babs Hart of Hart Insurance Group.