The decision of whether to buy long-term care insurance can be a tricky one. On the one hand, the insurance premium can be expensive, especially if you never use it. On the other hand, long-term care is also costly, if you ever need it.
An equally complex decision is whether you should cancel long-term care insurance once you’ve bought and paid for it for several years.
This is often a choice policy owners debate after their premiums have risen significantly.
With approval from state insurance departments, insurance companies can raise premiums on a block of policies (they can never raise just one person’s premium). Five or 10 years after you bought the policy, you may experience an increase in premium of anywhere from 5 percent to 25 percent. In some cases, insurance companies have been given approval to raise rates by 40 percent.
A few years ago, the industry experienced a number of rate increases. For example, in 2018, Genworth Financial received 120 approvals from state regulators to increase premiums on its LTC insurance business. The weighted average rate increase was 45 percent.
The National Association of Insurance Commissioners (NAIC) said that older policies were “initially priced when LTCI experience used to calculate rates was not fully developed.” Once policyholders started using their benefits, insurers realized they had underestimated their previous assumptions and had to correct them. This “made it necessary for insurers to increase LTCI rates to ensure future solvency.”
The NAIC and the American Association for Long-Term Care Insurance (AALTCI) say that with better historical data, the industry should experience fewer premium increases on policies purchased today and going forward.
Learn More: Long-Term Care Insurance Cost
The AALTCI offers a few alternatives to save on your current coverage instead of dropping your policy altogether.
One is to adjust the policy’s benefit period. AALTCI said the vast majority of people who require long-term care only need it for two to three years. Therefore, if you have lifetime or unlimited coverage, you can save on your premium by reducing the benefit period to somewhere between two years and five years.
AALTI also suggests adjusting the inflation growth option if you have an older policy that has risen in price. It said that many policies that increased in price carried a 5 percent compound inflation growth option. Dropping it to a 3 percent growth factor can make a difference in your premium cost.
Some people are in a financial position where they can only address one potential issue at a time. If your retirement savings are well short of what you need them to be, you may have to cancel your long-term care insurance and direct those premiums toward retirement.
On the other end of the spectrum, if you’re financially healthy and could pay for coverage from your savings, you may not need expensive insurance. Many people may also consider using their home to pay for long-term care, either by selling it outright or taking out a reverse mortgage.
But even if you have cash or other assets to cover potential long-term care needs, you should strongly consider whether you want to deplete your savings to pay for care if it’s needed.
Depending on where you live, the cost of nursing home care can run between $90,000 to $130,000 or more a year. Assisted living facilities run from $2,000 to over $5,000 a month. That can quickly erode your retirement savings or your home equity.
Whether you will ever need long-term care insurance is basically a flip of the coin. In fact, the AALTCI says that 50 percent of people who buy coverage at age 65 will use their policy benefits. That means the other 50 percent won’t.
Another consideration as you decide what to do with an existing long-term care insurance policy: How will you feel if you cancel the policy now and then need it in five or 10 years? Will the money you saved be worth the amount you will have to spend for long-term care? And how much will you regret paying premiums for several years before canceling the policy and then not getting the benefits when you need them most?
If you cancel a policy today with the thought of buying another one in several years, that may not make financial sense. Your age and health are key underwriting factors. Even with an increase in the rates of your existing policy, the policy you buy tomorrow will definitely cost more than the policy you previously owned.
AALTCI quoted one carrier’s rates in 2019 showing that a typical 65-year-old couple would pay between $4,800 and $10,200 annually depending on benefit period and inflation coverage. At age 75, that range climbs to between $8,700 and $14,700.
An important factor to consider is that you may still need long-term care in the future. If you can’t pay this entire expense out-of-pocket, you should have some type of long-term care coverage.
A popular option is to get a hybrid insurance policy that offers long-term care as an included benefit or optional rider. Many life insurance policies and annuities provide long-term care coverage as part of the policy or as an optional benefit. Some life insurance and annuity policies will advance the death benefit in the event the insured needs long-term care. Others provide separate long-term care insurance in addition to life insurance or annuity benefits.
You should also check with your state’s department of elder affairs or health department to see if they offer government programs to help seniors pay for long-term care.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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