Long Term Care Insurance Options & Pitfalls
Written by Ihealthcareupdates.com Staff Writer
The honest truth is, as with most insurance policies, the longer you wait the more expensive it is, and the less options you have. If you wait until retirement age to start looking at this option it won’t be financially advantageous. Read the Basics of Long Term Care Insurance
The Kaiser-Avalere study looked at rates from three large LTCI insurers in 2008 and said a policy for a 60 year-old person would cost between $2,140 and $2,460 a year if it offered the most commonly sought provisions — $150 per-day maximum, three-year benefit period, five percent compound inflation protection, comprehensive benefits, and a 90-day elimination period. Boosting the lifetime maximum to five years raised the annual premium to a range of $2,997 to $3,183. Much of the premium cost is generated by the compound inflation protection. But remember, even five percent compounded every year might not keep pace with health-care inflation trends. Couples also can buy coverage together, with substantially lower per-person costs.
If you can afford the premium for years to come, buy now to protect yourself and your family, but beware of the pitfalls.
As I continue listening to NPR, one of the things that individuals should be aware of are the pitfalls that are associated with Long Term Care Insurance, and its current state. Including poor claim payment, as well as rising premium cost.
To understand the pitfalls, you have to understand how this business helps the insurance company be profitable. Insurance companies earn revenue by collecting premiums and then investing that income. Because long-term care insurance companies typically do not pay claims for many years, they hold premium income for a long time and, thus, investment income is a very important part of their business model.
Those investments are limited by state insurance regulators to ultra-safe bonds. But ten-year Treasury bonds are returning just 1.6 percent. Five-year notes are paying a paltry 0.7 percent. That is far lower than overall inflation and significantly lower than the annual increase in long-term care costs, which is roughly 5 percent.
The math is brutal: No insurance company can pay claims and make a profit when its costs are rising by 5 percent but its investment returns are in the neighborhood of 1 percent.
Over the last three years, Unum Group, Guardian, MetLife (MET), and Allianz have all exited the business. And Prudential (PRU) said in March it would stop issuing individual LTC insurance.
The problem for insurance companies is that they had little idea of what they would actually need to pay out since they had so little experience. Insurance companies collect premiums for years before the vast majority of the insured will become old enough to need the care. That problem is compounded by the low fixed-income returns insurance companies are making on the premiums.
“I’ve been saying for 15 years that long-term care insurance is not viable,” University of Indiana professor emeritus of insurance Joseph Belth told Investment News.
Insurance companies that have stayed in the LTC business have had large rate increases. That naturally drives healthier plan members to drop coverage, making those who remain in pool more likely to need care. This happens year after year (the healthier leave and the sick stay) leading to an insurance phenomenon known as the “death spiral.” Eventually, the product or insurance company collapses under its own weight.
My recommendation is to look very seriously into the financial impaction that are associated with this insurance product. The cost of Health Care will continue to increase at an astounding rate over the next year, yes! the Affordable care act should help with some aspects of that however this is a politically hot topic right now, and no one fully knows where we will end up on that topic.
The last thing you want to do, is spend the next 10-20 years paying into a policy to only have a huge rate increase 10-15 years into having the policy, or when the time comes to reap your monthly investment, to get a pittance of what you need to support your long term care. At the end of the day an Insurance company sole purpose is to make a profit, and any additionally lost beyond what is expected will some how find its way back to the consumer. AKA you!!!!