Health care costs are one of the leading risks to a secure retirement, yet retirees tend to worry more about market risk than about outliving their money or facing expensive bills for medical and long term care, according to a new report from the Center for Retirement Research at Boston College. The stock market’s rocky performance during the first half of 2022 has surely heightened those concerns about market risk.
But I was reminded of my personal long-term care risk — and the cost of protecting against it — when I received a notice recently of a premium hike for the LTC insurance policies that my husband and I bought 16 years ago, when we were in our 50s. This is the third round of premium increases since we purchased the policies in 2006.
Low interest rates that have hobbled insurers’ investment returns, increased longevity, and lower-than-expected lapse rates have all contributed to the repeated need to increase LTC premiums. But understanding the reasons behind a price hike doesn’t make it any easier to swallow. It’s time (again) to reassess our LTC policies and review our options.
Over the past two decades, financial advisers and consumers have moved away from traditional LTC insurance and toward hybrid products, such as life insurance and annuities with LTC riders. Stand-alone LTC policies became harder to buy, with fewer insurers selling new policies, tougher medical underwriting, and higher premiums.
But having committed to buying LTC insurance years ago, my husband and I are reluctant to give it up. We received notice that the monthly premium or our John Hancock long-term care insurance will increase by 26.8% in mid-October if we want to keep our existing policies. Although John Hancock stopped selling stand-alone LTC insurance in 2017 in favor of life insurance policies with LTC riders, the company continues to service existing policies.
“When you are notified that your long-term care insurance policy premium will be increasing, the insurance company will give you options, and they are worth considering,” said Jesse Slome, executive director of the American Association for Long Term Care Insurance. The association provides a host of LTC data on its website, including typical premiums, claims data, cost of care and the likelihood of needing care at various ages.
Just as investors should review their portfolios and rebalance them from time to time, notification of an LTC insurance premium hike provides an opportunity to review existing coverage and alternatives, Slome said.
Most people’s long-term care insurance will pay some but not all of the potential costs, as consumers have gotten used to sharing costs with insurers in the form of co-payments and deductibles.
In addition, your personal financial situation may have changed, making you more able to shoulder some LTC costs from savings or current income, Slome said. For example, 16 years ago, my husband and I still had a mortgage and were paying for college for our kids. Today, those costs are history.
Our current policies would cover each of us for up to four years of care at home, in an assisted living facility or a nursing home after a 90-day elimination period. Our shared benefit option would allow one of us to borrow from the other spouse’s benefit pool if necessary.
We have invested about $70,000 in LTC premiums over the past 16 years. If we decided to call it quits today, we could stop paying premiums and have access to paid-up policies worth about $50,000 each but would forfeit the shared-care option. That wouldn’t buy much long-term care in 10 or 15 years, when we’re most likely to need it.
The last time we faced this choice in 2020, we avoided a 35% premium increase by agreeing to reduce our annual 5% compound inflation protection to 3.2%, which is about standard for current LTC policies and riders. The 2020 policy adjustment followed a 23% premium increase in 2012.
Translated into dollars, the initial premiums for our two policies were about $3,800 a year in 2006. Today we pay about $4,700 per year and if we accept the new higher premium, our LTC insurance cost will rise to about $6,000 per year. Or we could keep our current premium and scale back on annual inflation adjustment, reduce our daily benefit amount, or agree to a shared-cost option.
Despite the current inflationary environment, we’ll probably opt to reduce our inflation adjustment to 1.9% compounded annually. Thanks to the generous inflation adjustments in the past, our maximum daily benefit amount has more than doubled to $423 today, and our lifetime policy benefit now tops $617,000 each. That would pay for a lot of long-term care that I hope neither of us will ever need.
Holding the line on premiums today will give us more wiggle room in the future, because we know this won’t be the last rate hike. The John Hancock notification letter specifically stated that an additional increase may be coming in the future. We’ve been warned that we may have to review and rebalance our long-term care plan again.
(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s new 2022 ebook at MaximizingSocialSecurityBenefits.com)