MAKING CENTS: How to combat long-term care premium rises

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Premiums for long-term care insurance are on the rise. A few of the major companies have applied for permission from state insurance commissioners to significantly raise their rates.

Among the reasons why are two primary theories. One is the slowdown in sales and the higher than expected lapse rates among policy holders.

It is possible that policy holders simply refuse to pay the higher rates requested by some insurers. The second theory would be insurance companies underestimating the risk and expected increases in longevity. This theory, ironically, builds a case for considering long-term care insurance.

What alternatives may there be to own the coverage and not be stung by future premium rises?

There are two alternatives.

Most long-term care insurance is quoted in the premium mode that would have you paying for life. These are most susceptible to future premium increases.

But a 10-pay policy, which would require a larger annual outlay of cash, is fully paid for in the 10-year period.

The company can apply for a rate increase within the 10 years, and you could pay more at some future point. But at least that initial exposure is going to last for the remaining years of the 10-year commitment.

This shorter payment period may make sense for younger applicants or business owners who may be able to deduct some or all of the premiums.

A second alternative may be one of the new hybrid life/long-term care policies. These are life insurance policies that are designed to provide long-term care benefits during your lifetime.

These policies generally require a large cash deposit from the policy holder, but they have characteristics very different from most life policies. These are not bought for a death benefit, the death benefit is merely incidental to the core purpose of providing long-term care benefits.

The initial deposit, buys three benefits. First is the promise by the insurer to pay long-term care benefits should you qualify. Second is some life insurance benefit. The amount of the death benefit is more than your initial deposit, but it will never have the leverage of a typical life policy.

The third benefit, one that people generally like the most, is the policy holders’ ability to surrender the policy at any time and receive a full refund of premiums paid. With interest rates at all time lows, this alternative has been extremely attractive to those reluctant to pay premiums on traditional long term care policies.

 

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

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