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The real cost of (not having) LTCI

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Many clients who reject long-term care insurance (LTCI) or consider dropping their coverage do so on the argument that it’s too expensive.

But that attitude overlooks several important aspects of the costs of not buying the coverage, including the financial and personal burdens imposed on long-term care (LTC) recipients’ families. We asked several LTCI experts for their thoughts on the cost issue and how they approach it with prospects and clients.

A focus on premiums
If you’re not yet experiencing client complaints about LTCI rate hikes, get ready. And don’t be surprised if you get calls from policyholders who bought the insurance from other advisors.

Honey Leveen, LUTCF, CLTC, LTCP, in Houston, has received many calls from policy owners whose agents are no longer in the business.

The callers, typically in their 70s and 80s, bought the policies when rates were much lower and now they’ve received a rate increase notice. Their initial reactions, says Leveen, are fear, rage or a mixture of both.

The pricing pressure is likely to persist. Insurers continue to request rate increases from state regulators; those requested hikes can be substantial and headline-grabbing.

In May, for example, John Hancock Life Insurance Co. re-filed a request for a 58.1 percent average increase on its LTCI group plans in Connecticut.

Regulators denied the request in August after an actuarial review. This was Hancock’s third increase request in the past two years, and the Connecticut Insurance Department disapproved all three.

Even if your clients haven’t experienced a proposed or actual rate increase, they’re probably reading news reports describing seniors on fixed incomes getting squeezed by LTC insurers raising premiums.

For example, a Sept. 6 Boston Globe article, “Long-term Care Insurance Premiums on the Rise,” discussed price trends and consumers’ complaints. Since early 2012, the article notes, the Massachusetts Division of Insurance has regularly approved LTCI premium increases of about 10 percent.

Requests to nearly double rates are under review, according to the article.

The paper also reports that the average cost of a policy for a 55-year-old couple has increased 80 percent since 1987, climbing from less than $2,000 to over $3,500 over that period.

The American Association for Long-Term Care Insurance 2013 Long Term Care Insurance Price Index cites similar current costs, with premiums for a couple age 55 ranging from $1,816 (good coverage) through $1,942 (better coverage) to $3,725 (best coverage).

Phyllis Shelton, president of LTC Consultants in Nashville, Tenn. and author of “Protecting Your Family with Long-Term Care Insurance” (LTCi Publishing, 2013), struggles to understand the hoopla over higher premiums.

The major carriers have been selling LTCI since the late 1980s, she notes. In the intervening years, rate increases were typically modest or nonexistent until the economic downturn in 2008.

Raising rates in response to higher costs is standard business practice for insurers, says Shelton, whatever line they’re in, and consumers typically understand this.

“Automobile and homeowners’ insurance go up constantly,” she points out. “Some of the (LTCI) carriers either have had no increase or they’ve had one or two, and people are flipping out.”

Some carriers, such as Hancock in the previous example, request larger catch-up increases while others distribute them more evenly over time.

Nonetheless, says Shelton, the percentage of increase over a 20-year time is not that much and policyholders and the news media need to keep it in perspective relative to overall medical-care inflation.

Shifting the conversation
Policyholders’ aggravation over higher premiums is understandable but it often results from a lack of education, says Leveen, especially among policyholders without agents.

In Leveen’s experience, policyholders calm down when they understand the impact of insurers’ claims experience and low interest rates.

“Once the circumstances are explained in a businesslike, rational, professional manner, the anger just goes right off their back,” she says. “They just say, oh, well, the rate hike is so that the company is going to be around to pay my claim in 10 years.”

Another key element policyholders need to understand is that the cost of care continues to increase.

According to MetLife’s Market Survey of Long-Term Care Costs, the 2007 national average daily rate for a private room in a nursing home was $213; in 2012, the amount had increased to $239 (up 12.2 percent over the five years). A semi-private room cost $189 in 2007, $214 in 2012 (up 13.2 percent).

The national average, private pay monthly base rate for an individual residing in an assisted-living community rose from $2,969 to $3,477, an increase of 17.1 percent.

Per-day rates don’t convey LTC’s full impact for longer stays, however.

Convert the per-day and monthly rates to annual values and the 2012 numbers become eye-openers: private room: $87,235; semi-private: $78,110; assisted living: $41,724.

Beyond direct costs
Besides these direct costs, care recipients and their families typically incur additional substantial expenses in uninsured LTC cases.

Genworth’s 2010 study, “Beyond Dollars: The True Impact of Long Term Caring,” examined these costs. The authors found that care recipients and caregivers face four major sources of financial strain:

  • Out-of-pocket expenses for care, medications, transportation, etc.
  • Home modifications such as ramps, railings, bathroom modifications and other adaptations required around the home.
  • Facility care or daycare when the caregiver is unavailable.
  • Lost income.

Care recipients spent an average $14,000 out-of-pocket for their care, not including facility charges, and family members spent $8,000 out-of-pocket.

Caregivers also share the burden when a parent decides against buying LTCI and subsequently needs care.

A recent study published online in The Gerontologist by Karl Pillemer and J. Jill Suitor entitled “Who Provides Care? A Prospective Study of Caregiving Among Adult Siblings” studied caregiving to elderly mothers. The authors found that adult daughters were twice as likely as sons to fill the caregiver role. Proximity was another factor: adult children located within a two-hour drive of their mother were six times more likely to give care than children who lived farther away.

Genworth identified several major impacts on caregivers: financial; career; savings and retirement contributions; and family and relationships.

Among the key financial findings for primary caregivers:

  • 83 percent contributed financially to the care recipient.
  • 57 percent withdrew funds from retirement or savings accounts.
  • 48 percent reported losing jobs, changing shifts, or missing career opportunities.
  • 44 percent had to work fewer hours.
  • 44 percent experienced increased stress with their spouse.

The impact of an uninsured care need can strain family relationships, as well.

Sharon Luker, CFP of LTC Planning Consultants in Plano, Texas, describes a case involving an elderly woman, her second husband and her adult children. The husband decided to place his wife in an assisted-living facility although she’ll probably need nursing home care in the near future.

The woman does not own LTCI and her children are upset at the potential cost of care their mother is facing and its impact on her finances.

“It is causing huge conflict in the family to the point of (the children asking) why can’t you (the husband) take care of her?” says Luker. “Why are you putting her in a facility? Why are we having to pay for that? So, it causes conflict in that if they had a policy in place, they wouldn’t hesitate to get her the care that she needs.”

Evaluating premium increases
LTC’s costs to uninsured care recipients and their caregivers make a strong case for owning LTCI or continuing to hold it after a rate increase.

Shelton encourages potential buyers to look at the LTCI premium, multiply it out 30 years and compare it to what their benefits will be in 30 years. “What I’m seeing for people in, say, their mid-50s to early 60s, somewhere in there, is that number usually computes to about 10 percent,” she says. “You’ve paid in about 10 percent of what the benefits will be in 30 years. Will there be class rate increases? Absolutely. But, there’s a big difference in (paying) 10 percent and paying in the full 100 percent. I always ask, is it easier to come up with $500 a month or $6,000 or $7,000 a month? Which would you rather come up with?”

Still, some policyholders will be challenged to pay higher premiums if the insurer raises rates significantly. In those cases, advisors need a system for evaluating the post-increase options.

In her book, Shelton details a case where the clients’ annual premium was scheduled to increase by 90 percent. (She had not sold them the original policy; the clients came to her for an evaluation after receiving the rate notification.)

The carrier offered to maintain the original premium if the clients agreed to reduce their policies’ inflation factor from 5 percent compounded annually to 2.7 percent. The key factors that Shelton and the clients reviewed included the clients’ ages; their families’ longevity and Alzheimer’s histories; various combinations of reductions in daily benefits and benefit periods; and projections that compared policy costs to the potential benefits. After considering these factors, the clients decided to keep their original benefits and pay the higher premiums, with the understanding that they can reduce them in the future if the costs become burdensome.

Mike Westling, CLTC, of Assured LTC Planning in Eagan, Minn., takes a similar approach when clients receive rate increases. He shows clients what it would cost to replace their policies with comparable benefits at today’s rates, which are usually much higher than the increased premium. He also explains the value of their existing inflation adjustment benefit and evaluates the impact of accepting the insurer’s offers for reduced benefits. This approach has helped him to retain clients. “I’ve been doing this for 10 years,” he says. “I have had numerous clients have a rate increase and have not lost any of them due to the rate increase.”

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