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Rates on the rise

 

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Special to The Miami Herald

Henri Spiegel and husband Michael Wolk bought long-term care insurance about five years ago. In December, the Miami Beach couple learned that their John Hancock policy’s rates would rise 40 percent this year.

“I was enraged,” said Spiegel, 57, an attorney. “A 40 percent increase is just exorbitant.”

Spiegel and Wolk are not alone. Many long-term care insurance customers who bought their policies several years ago are seeing a bump in rates, said George Braddock, a long-term care insurance specialist with LTC Financial Partners in Miami. “The industry average for rate increases are from 10 to 25 percent, but insurer John Hancock has had an average increase of 44 percent that started going into effect about a year ago,” he said.

Braddock blames the rate increases on two things. The first is that years ago when setting prices, insurance companies grossly underestimated how much future claims would cost. People are living longer than expected, custodial care costs are rising faster than projected and more people are keeping and using their policies.

The second is the downturn in the economy. “Insurance companies are forced to invest conservatively, because they need to have enough in reserves to pay out claims,” he said. “The downturn in the economy didn’t just affect their sales” but the return on their reserves.

The wave of retiring baby boomers also was something that long-term care insurers did not adequately account for when originally setting rates, said Helen Salazar-Realini, a certified financial planner with Raymond James Financial Services in South Miami.

Spiegel said she felt duped because when she and Wolk bought their policies, they asked about rate increases “because I know health insurance goes up,” Spiegel said. “But all the guy said was ‘All I can tell you is that they’ve never had an increase.’”

Braddock said all premium increases must be approved by insurance regulators in each state. “They are justifiable increases,” he said. “They had to approve them. If the regulators had said no, and the insurance companies can’t pay claims in the future, everyone loses.”

If your long-term premiums have risen, there are basically three things you can do: drop the policy, pay the increase or alter your coverage.

“I’ve had people ask me to price them with a different carrier, but prices are determined by age and health,” Braddock said. “It almost always costs more” to switch.

He said it’s important not to lose perspective. In Florida, care costs can range from $3,000 to $9,000 a month, Braddock said. “Keep the big picture in mind,” he said. “I’m a policy holder. I got a rate increase and I wasn’t jumping for joy…but with or without a policy, you’re going to need care from someone. You can rely on your family, but at what cost?”

If you have a rise in premium on your long-term care policy, the first thing to do is evaluate your coverage, said Tessie Yuste, a certified financial planner with The Lubitz Group in Miami.

“How much is your daily benefit? How much is your coverage and for how long?” she said. “The most important thing is to understand the benefits of the contract.”

One couple, ages 69 and 70, came to her because their long-term care premium rose 25 percent from 2012 to 2013. Yuste evaluated the policy, which had an unlimited benefit period, and a 5 percent inflation protection rider.

“The couple had bought the policy 13 years ago. I looked at the original premium, and how much the premium had increased compared to the increase in benefit because of the inflation protection,” Yuste said.

She found that the couple had a 3.8 annual increase in premium, compared to a 5 percent annual increase in daily benefit.

“He was coming out ahead. Plus he had an unlimited benefit, which is not being offered much today,” Yuste said. “It’s important to look at the individual policy. He would have lost a lot if he had switched policies.”

The average nursing home stay is 18 to 36 months, Yuste said. “The fact that he had coverage for a longer period of time is very valuable.”

Salazar-Realini bought her long-term care policy 10 years ago. She has a $150 daily benefit, a 5 percent inflation rider and lifetime coverage. She pays $1,500 per year, and has not had a premium increase. “But even if they doubled my premium, it would still be a good deal,” she said. With the national average of $70,000 a year for a semi-private room in a nursing home and $39,000 for an assisted living facility, she said the potential benefit is greater than the cost.

Here are several strategies to cope with long-term care rate increases:

Adjust your inflation protection

When John Hancock raised its rates, it offered customers who had 5 percent compound inflation protection a chance to reduce the inflation protection to 2.8 percent instead of paying the rate increase. “Virtually all of my clients took that option,” Braddock said.

Spiegel said she and Wolk, 62, an interior designer, were offered the inflation protection drop, but decided not to take it. “We didn’t want to lower our protection,” she said.

Shorten benefit period

If you have an unlimited benefit period, you can shorten the time frame to save on premium, Braddock said. “Most people don’t need a policy for more than five years,” he said.

Change the daily/monthly benefit

The average daily benefit that people buy is $100 to $200 per day. You could reduce that amount to save on premium, Braddock said.

Lengthen the elimination period

The elimination period is the time period that you pay your own expenses before long-term care kicks in. Most people have a 90-day elimination period, Braddock said, so extending it is not the best idea. If you doubled it to 180 days, you would double your costs without a proportional reduction in premium.

Decide how much coverage you need

“There’s no rule that you have to protect 100 percent of risk or go naked,” Braddock said. “You don’t have to drive a Lexus or keep walking. The idea is to have enough money between all of your resources to take care of your needs.”

Yuste advises clients to look at the “safe income,” such as pensions, Social Security and annuities, that will be coming in on a monthly basis. “You might not need the maximum daily benefit of a long-term care policy,” she said.

If you don’t have long-term care

If you don’t qualify for long-term care because of health reasons, if you drop your policy or can’t afford it, Yuste advises setting up a savings account to tap only for future healthcare costs.

If a client has a large amount of home equity, that’s a possible revenue source to tap into for future healthcare needs, either through a home equity loan, reverse mortgage or through selling the property, Yuste said.

Salazar-Realini said a 75-year-old single female client with no children bought long-term care 10 years ago. She chose a reverse mortgage to supplement the policy to pay for care as she ages. “If you don’t have a spouse or heirs to care for, I would recommend this option,” she said.

Some annuities, such as products offered by Protective Life Insurance, allow you to add a rider to take out double your normal withdrawal for long-term care, Salazar-Realini said.

New riders on life insurance policies that started becoming available late in 2012 allow up to 4 percent of a life insurance policy’s benefit to be used on long term care, until the face value of the policy runs out, Salazar-Realini said. It’s not cheaper to do it this way, but the benefit is if you never need long-term care, your family gets the benefit of the life insurance policy. John Hancock offers a policy with this benefit, Salazar-Realini said, but you have to qualify both financially and healthwise.

Think of the big picture

Spiegel and Wolk decided to pay the higher premium and keep their coverage, in part because they don’t want to be a financial burden on their son if their health fails as they age.

Spiegel said they originally bought the coverage because her mother, 91, has lived with them for several years because of declining health.

“My parents didn’t have long-term care, but they lived conservatively” and savings and funds from the sale of their home pay for her mother’s expensive in-home care, Spiegel said.

“It has been a life-altering event, and if there hadn’t been the money, then I don’t know what we would have done,” she said.

But the rate increase is still a bitter pill.

“I called the state insurance commission to complain, because I don’t think it’s ethical,” she said. “I think something is wrong, and it should be looked at from a legal standpoint.”

Yuste said despite the price hikes, long-term care is still a prudent way for people to take care of themselves in the elderly years without being a burden to their children. “There are a lot more pros than cons,” she said. “It’s really hedging a risk that is unknown in the future, for a relatively reasonable expense.”

Most Americans don’t have sufficient assets or equity to be able to afford a long stay in the more expensive facilities, Yuste said.

Salazar-Realini said individuals should examine all of their options before making a hasty decision about a long-term care policy. “I think if people do the numbers, they will be really surprised at how good an idea it is to keep it.”

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