Long-term care insurance really is long term: buying a policy commits you to pay premiums over decades. If you stop those payments, thousands of dollars you have already spent might as well have gone down the drain.
A new study suggests that is exactly what a sizeable number of policyholders are doing — allowing their policies to lapse.
More than one-third of long-term care insurance policyholders who buy policies at age 65 or older let their coverage lapse sometime in their lifetime, according to a study by the Center for Retirement Research at Boston College.
The study concludes that individuals most likely to let a policy lapse are those who need the coverage most — those with cognitive impairment, and might soon need care, or those with low income and wealth, who would be in financial jeopardy in a medical crisis.
Long-term care insurance covers expenses for nursing home or home care if you become incapacitated — most of which is not covered by Medicare and can be extremely expensive out of pocket. The annual cost of a private nursing home room this year is $91,250, according to an annual survey by Genworth, the largest underwriter of these policies.
The Center for Retirement Research findings come at a time with the long-term care insurance industry is struggling. In 2014, new sales of individual policies fell 22 percent from 2013, to $316 million, according to LIMRA, an insurance industry research and consulting group. That sales pace is less than half what it was a decade earlier (2004). Fewer than 8 percent of Americans over age 50 own private long-term care insurance, according to LIMRA.
Defenders of the industry have been pushing back against the report. Industry data suggests that no more than 1 percent or 2 percent of policies are allowed to lapse in any given year. But the Center for Retirement Research widened out the lens to the long view.
“Even if the annual lapse rate is just 1 or 2 percent, that builds up to a very high cumulative rate over many years,” said Anthony Webb, a senior research economist at CRR and one of the report’s authors. “Long-term care insurance is a very long-term contract — you take it out at 65 or younger, but you’re likely to be making claims in your eighties or nineties.”
Analysis by LIMRA and the Society of Actuaries found that long-term lapse risk is 25 percent, “but that figure probably is on the high side,” says Marianne Purushotham, LIMRA’s corporate vice president of research, noting that the industry acknowledges it has had trouble tracking lapse data with accuracy.
Two insurance underwriters I contacted for this column — Genworth and Northwestern Mutual — refused to comment.
WHAT YOU CAN DO
The study does not mean long-term care insurance is inherently risky to purchase — just that a buyer needs to safeguard against an unintended lapse.Policyholders can ask the underwriter to add the name of a trusted family member or friend who can be sent a reminder if premium payments are due and have not been paid.
Also think carefully about your ability to sustain premium payments. A healthy, single 55-year-old male buyer can expect to pay an annual premium starting at $1,060 this year for $164,000 of potential benefits, according to the American Association for Long-Term Care Insurance (a female buyer will pay $1,390).
Keep in mind that premiums can rise sharply over time. That has certainly been the case in recent years, with many underwriters pushing through double-digit rate increases.
Policyholders who receive notice of rate hikes will usually be offered options for changing coverage to keep premiums steady.
Your options include cutting back the daily benefit amount or increasing the elimination period, the waiting period before coverage kicks in.
Another option is to adjust your inflation protection, since this is a major driver of premiums. The most popular inflation rider is an automatic 5 percent annual increase, but some experts think 3 percent provides adequate inflation protection.
Also check the length of time that benefits would be paid under your policy. Three years of coverage is adequate for most people who use benefits, with a 90- to 180-day elimination period.