For fixed-income seniors who've planned ahead for the likely prospect of long-term care, their financial assumptions might be upset in the coming months.
Several insurance companies including John Hancock and Genworth Financial are seeking state governmental approval for long-term care premium hikes of 50 percent or more, according to USA Today and the New York Times. In fact, the increases have already taken effect in a few states.
“We're definitely seeing a lot of increases, especially for older policies,” Clarissa Hobson, financial planner with Colorado Springs' Carnick and Kubik, told the New York Times. “Some increases are as much as 40 to 60 percent.”
While some critics claim insurers purposefully under-priced their policies to begin with, most financial experts cite actuarial difficulties as the main reason for the sudden and drastic hikes. Lisa Horowitz, a New York-based CLU, ChFC and long-term care expert, agrees.
“We used to refer to long-term care as the final frontier of insurance,” she said. “Life insurance, car insurance and property and casualty insurance have been around a long time, and actuaries can accurately figure out what to charge. But when you have a product without a long history of claims, you're missing a big piece of the puzzle.”
Aside from the lack of actuarial data, long-term care insurance has been particularly difficult to price because it must take into account both morbidity and mortality. Not only are people living longer, noted Horowitz, they're living with life-changing ailments for far longer than anyone thought possible ten to twenty years ago.
Insurance companies may have assumed in the 1990s and early 2000s that an Alzheimer's patient would only require a few years in assisted living or nursing care, for instance, while today ailing seniors can live a decade or more. Insurers who want to stay in the market not only have to account for such cases in the future, they also need to raise current premiums to absorb the costs of hundreds of thousands of miscalculations.
Furthermore, while a lack of regulation might have once contributed to making claims difficulties, Horowitz said she doesn't believe legislation is to blame for the impending premium increases.
“When we first started selling these policies, there were all kinds of provisions about having to be in hospitals first, which could prevent people from being able to collect,” she said. “The market wasn't properly regulated, but those days are over, and it's now strictly regulated by state protection departments.”
Just how long will advisers and their pre-retiree clients have to wait until actuarial calculations improve?
“It's impossible to tell right now, but I would think things will get better within the next five to 10 years,” Horowitz said. The older boomers currently entering retirement may have to deal with frequent increases for the next decade or so, but those 55 and younger will have access to a market with 20 or more years of long-term care actuarial data.
If one thing's sure, though, it's that just about everyone will require some level of long-term care.
“Unless you drop dead of a heart attack or die of cancer, most of us are going to need assistance, whether that's at 80, 90 or even older,” Horowitz said. And, while a combination of medical improvements and healthier lifestyles might eventually lead consumers to pay premiums for far longer before they actually need care, today's insurers must continue to offset the costs of their customers' unexpectedly long life spans. For advisers with clients facing these drastic hikes, Horowitz recommends a combination of the following measures:
- Choose higher deductibles over higher premiums.
- Reduce benefits periods.
- Reduce or eliminate cost of living adjustments. This isn't an ideal strategy, but it may extend the longevity of a policy.
- Lengthen the elimination period. Shorter elimination periods usually mean higher premiums, and the longer clients can last before collecting, the more longevity their policies will have.
- Look into switching to alternative options such as long-term care life insurance riders or Medicaid-supplemented long-term care insurance.
Finally, consumers who can plan for long-term care decades in advance should do so, though that's certainly easier said than done.
“It's vital, but you can't take blood from a stone,” Horowitz said. “If a 40-year old is supporting a family with a partner, and they're barely paying for everything now, there's not much left to save. I can always find a few bucks, though, and even 20 per month is better than nothing.”