The Drawbacks of Long-Term Care Insurance
According to the U.S. Department of Health and Human Services, 70% of current 65-year-olds will use some form of long-term care (LTC) in the future. LTC insurance policies help pay for at least some of the cost of this care, including services that are not covered by Medicare and employer-provided health insurance. While having a policy like this can be greatly beneficial, especially for those who will require many years of care, there are issues with long-term care insurance and the industry around it that are worth noting.
The Troubled History of LTC Insurance
Long-term care insurance first appeared in the 80s and 90s and has faced numerous problems in the years since. It was priced poorly when it first made its debut, with insurers assuming that more people would drop their policies over time than actually did. Insurance companies also failed to account for the fact that people are living increasingly long lives, but may not always be making healthy decisions. This uncertainty regarding the costs and quantity of future claims took its toll, as did the 2008 recession. Companies who offer long-term care insurance plans make most of their money off of interest, and the low interest rates in the wake of the recession, combined with the myriad other problems with the industry, were financially devastating. As a result, the number of companies offering LTC insurance plummeted. While there were more than 100 companies selling significant numbers of LTC policies in the late 1990s, by 2014 only 12 remained. Those companies who did stay in the market were forced to significantly increase the price of the plans they offered.
One of the main drawbacks to long-term care insurance is its cost – which, as noted above, has only gone up over the years. At the moment, the average yearly cost of long-term care insurance is about $2,700, though for some it can be significantly higher. A recent survey by Consumer Reports found that only 22% of their subscribers had invested in long-term care insurance. Overall, only a little over 7 million Americans have LTC care insurance, and cost is the greatest barrier preventing more people from acquiring it.
And the prices continue to rise. Some policies are on track to exceed $8,000 in annual rates. While LTC insurance premiums are more stable than they were in the past, they are also more expensive than they have ever been before. Life Plans, an insurance industry research firm, reported that the median income of persons purchasing LTC insurance has increased from $62,500 in 2005 to $87,500 in 2015. The rising cost has priced many middle-income people out of purchasing long-term care insurance entirely. Even those who can afford policies are opting for increasingly shorter-term plans and fewer benefits due to cost concerns.
Unstable Rates & Increased Premiums
Gradual increases in LTC insurance premiums over time is perfectly normal, but more sudden and substantial price hikes can also happen. While you can’t be singled out for a rate increase, insurance companies do have the ability to increase the rates for an entire class of policies within your state. Premiums for some LTC insurance customers increased by as much as 130% in 2016. Anyone who decides to purchase a long-term care insurance plan must keep in mind the possibility of a rate increase and know that even if the cost does go up, they need to continue to pay their premiums if they want to receive all their benefits later on. It is generally recommended that you budget for your premium to increase by as much as 50% at some point down the line.
While the need to keep up with one’s premiums seems like a no-brainer, a 2015 report from the Center for Retirement Research noted that 25% of people who purchase LTC insurance policies at the age of 65 will lapse in their payments, most commonly due to financial difficulties or cognitive decline. When this happens, a long-term care insurance plan becomes worse than useless – not only will you not be receiving benefits, but you also can’t get back the money that you already put into it. The best way to avoid a situation like this is to get a plan with nonforfeiture options. If you fail to pay one of your premiums or if you drop your benefit, nonforfeiture options allow you to receive a reduced amount of benefit based on the amount that you have already paid into the plan. Some states require plans to have such options, but others do not. If you are considering purchasing LTC insurance and want to make sure that you have your bases covered in case you can’t make all your premiums, check and see what the situation is in your state. If your policy does not include this type of option, all payments made before you stop paying premiums will be forfeit.
While there are definitely drawbacks to long-term care insurance, it isn’t all bad news. The issues that companies offering LTC insurance policies faced in the past have forced the industry to adapt and offer new choices and more reliable rates. While expensive, LTC insurance premiums are more stable now than they have ever been before, and there are plenty of upsides to getting a long-term care insurance policy. To learn more about these, take a look at our article “The Benefits of Long Term Care Insurance”. If the downsides listed here have made you curious about what other options are out there, we have articles where you can learn more about the alternatives to LTC insurance as well. Do your research and make the decision that best suits your needs and budget.
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