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May 24

Welcome to New Subscribers and How to Evaluate a Rate Increase

I’d like to take the opportunity in today’s blog to welcome all my new subscribers from the May 7th article from Suze Orman updating her followers on the LTC insurance market and sending them to me for help.  Please know that I’m so honored to hear from everyone who has contacted me through her article and very happy to help as many of you as I can. I invite you to explore this website and send me any questions through this link as I answer all questions personally. For example, many of you asked me about CNA, based on Suze’s comment and my answer is not to worry. CNA has an entirely new claims management team and is moving the entire claims operation to make sure that service improves and is excellent in the future.

In this article, I’m going to address rate increases on long-term care insurance as a number of people have said my formula on how to evaluate the rate increase has been very helpful. Recently, I had a chance to share my formula again.

A lovely couple from Crossville, Tennessee found me when Bottom Line-Personal published my thoughts on the international coverage that is available for long-term care. (Trivia Alert: they were looking for an agent in Crossville, TN but couldn’t find one…turns out that’s where I graduated from high school…yes, believe it!) Here was the husband’s question:

I have a Genworth LTC policy that I have been paying for over 15 years and they have raised the premium by almost 50%.  I’ve been told by them that I should keep paying the new rates or lose all the money I’ve paid in over the years.  Can I adjust the coverage and reduce the premiums?  They say it’s like auto insurance, pay the premiums or lose the coverage.  It looks to me like a scam. 

I shared with him that he had received incorrect information as when you get a rate increase, insurance companies will allow you to decrease benefits and lower the premium to make it more affordable.

However, a simple formula to determine if you want to do that instead of accepting the rate increase is to multiply the new premium times 20 years and compare that number with the benefits you will have in 20 years, realizing that newer policies will waive the premium for home care as well. If you are thinking about reducing your benefits, subtract the decreased premium from the rate increase premium and compare the premium savings over 20 years to the amount of benefits you will lose at that time. After these two steps, many people accept the rate increase, realizing it’s actually a really good deal compared to paying the cost of care itself.

Bob and Judy bought really good policies in 2002 at the ages of 63 and 60 for an annual premium of $4400 for both of them. This premium got them a daily benefit of $150 and a benefit account of 2,190 days (6 years), which equaled $328,500 for EACH of them the day they got their policies. They bought 5% compound inflation. Now they were faced with a 40% rate increase that would take their premium from $4400 to $6,171. What would you do? Here’s the analysis:

$4400 to $6171 = 40% rate increase.

Premium they have paid: $4490 x 13 years = $57,720

How their coverage has grown:

$150 daily benefit x 5% x 13 yrs = $282

$328,500 benefit account x 5% x 13 yrs = grows to $619,435 x 2 = $1.2 million TODAY

They are now 76 and 73, in reasonably good health and can easily live another 10 years. In 10 years, they will each have a $1 million benefit account and a daily benefit of $460. Based on what they have already paid and the new premium of $6171, they will have paid in about $120,000. Yes, they will likely get another rate increase in the next 10 years, but there’s a huge difference between $120,000 in premium and $2 million in benefits! When presented with this information, they gladly accepted the new premium of $6171.

Oh, could they have reduced their benefits and lowered their premium? Sure. Suppose they could have avoided the rate increase by reducing their benefit account from 6 years to 3 years? That would mean 10 years from now they would have paid in a total of $101,200 over 23 years. Their benefit accounts would be cut in half from 6 years to three years so $1 million in 10 years, not $2 million. [That’s the daily benefit in 10 years of $460 from the above paragraph x 1,095 days = $503,700 each.]

Let’s say they were lucky enough to average 6% compound earnings on the annual savings of $1771 in premium. In 10 years, they would earn about $70,000 before taxes and investment fees. They couldn’t see giving up $1 million in benefits for that paltry amount of savings.

If you are faced with a rate increase, I encourage you to apply this formula. If you still feel the rate increase is still unaffordable, please do not cancel your policy. Instead, ask the insurance company about reducing your benefits to lower your premium and maybe even avoid the rate increase altogether.

 

12 comments

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  1. Tom

    My wife and I just purchased long term care insurance thought my work in Feb 2016, from CNA. I have noticed in your response article above you said not to worry, that CNA has a new claims team in place. Have you received and further feedback on improvement of there claims processing? The reason I am asking is that we have not been with them that long and I would rather cut my loses now and look at MedAmerica as recommended if CNA long term care claims processing continues to have such bad reviews. I work for the government and they no longer have CNA as the long term care insurance provider.

    1. Phyllis Shelton

      Yes CNA has a new claims team and they are working very hard to restore excellent service. MedAmerica no longer offers plans to new applicants. You are also eligible for the Federal LTC Insurance Program (FLTCIP) which is at http://www.LTCFEDS.com. If you bought the CNA group plan at work, make sure you have enough inflation coverage. Having a built-in factor that grows your benefits automatically each year is less expensive than paying extra each time you accept a benefit increase. If you need help figuring out if you have enough coverage, let us know.

  2. Kathy

    My husband and I just started a policy with Genworth for our long term care insurance. After reading the above questions, all mentioning Genworth and their rate increases, should we consider switching to a different company?

    1. Phyllis Shelton

      Hi Kathy – the good news is that the policies Genworth is selling today have been priced for the future. Hopefully you bought a good inflation benefit as well so that your benefits will be as meaningful in the future as they are today.

      1. Larry Cohen

        My wife and I purchased LTC in 1999 from GE Capital Insurance (which later was sold to Genworth). We bought $150/day, 50 day elimination, 5% yearly increase in benefits (but not compounded which was too expensive). For the last 5 years Genworth has raised the premium 10% every anniversary. So we now have a policy with a $270 daily benefit with unlimited payment after the 50 day elimination.
        I still think it is worth the payments, so will continue to pay even though I expect the 10% increases will continue.
        What I do not see in all these comments on LTC options (reducing benefits or stopping payments and taking the paid-in benefit option) – is that some (most?) policies that have Husband and Wife paying in over ten years – have a survivor clause whereby if one person dies before getting any benefits, the other spouse no longer has to pay any premiums. Morbid, but a benefit no less that implies you should keep on paying the premiums.

        1. Phyllis Shelton

          Larry, you still have an incredible deal. Think about it. Your plan will pay up to $98,550 a year TODAY, or $8,212 a month, and your daily benefit will continue to increase $7.50 each year so will double in 20 years to $540 a day, which is $197,100 a year and $16,425 a month. THEN you have UNLIMITED benefits, which is extremely rare today. Then you AND your wife both have the plan so in your lifetimes, it could pay out millions. On top of that, your premium stops when you have a claim and your daily benefit will continue to increase $7.50 each year.

          You mentioned the survivor benefit. Not all that many companies have offered it so most people do not have it. It adds about 9% to the premium, a great deal in my opinion since it means the premium stops on the surviving spouse after 10 years. The people who bought that are fortunate indeed. Not that we want to have to use it or to have to use our LTC insurance benefits at all, but how comforting to know we have that help if we do. I can tell you first hand that God has used insurance many times in my own life and the lives of my family members. You and your wife should be so proud of yourselves for taking the coverage out 14 years ago and when you see those 10% rate increases, just rejoice that you have such a great plan!

  3. Caren Fischer

    Is there a cap that an insurance company can raise premiums by per year or per lifetime of a policy? What would prevent an insurance company from raising premiums so high on a policy as a person gets older that it’s no longer possible to pay, so the insurance company no longer has that liability?

    I’m very suspicious that paying for long term insurance is not a guarantee of benefits when you need them.

    1. Phyllis Shelton

      Excellent and legitimate question Caren. No, there isn’t a cap on a traditional policy but each increase has to be approved by the insurance department of each state. With newer policies, there’s a contingent nonforfeiture benefit which means if your premium goes up a certain percentage based on your issue age, you will receive a nonforfeiture benefit. This means you would be offered the opportunity to stop paying your premium and receive a claim paid at any point in the future equal to the premiums paid in. If it makes you feel any better, the last Society of Actuaries meeting on LTC insurance said that with policies issued today, there’s about a 12.5 percent chance that they will need to have any kind of major rate increase. But who knows about the future, right? There are hybrid policies that combine LTC insurance with life insurance that have guaranteed premiums for life. You just have to be careful and get the inflation benefit that you need so that the benefits are as meaningful in the future as they are today.

  4. Adam Jacobson

    We also just received a major increase to about $5200 from Genworth We are 49 and 50.
    It’s no the money per se – rather it’s Genworh’s precarious financial position.
    While their current year is not as horrible as last year, it still doesn’t give a high level of security. And that is, after all, the point of insurance.

    1. Phyllis Shelton

      I think Genworth will do everything possible to pay claims Adam. However, you are still young enough to make a change. If you want me to evaluate your current coverage along with this rate increase, please complete the short questionnaire here and we will get back with you to set up a convenient time for us to talk.

  5. Rosemarie Hughey

    I got a Genworth Long Term asking for a premium increase from 84.61 to 96.46 on 12/16/15 thereafter on 12/16/16 to 108.31 and 12/16/2017 to 120.15
    but with the note that there might be another premium increase. I am single on SS (72 years) what is your suggestion…they do offer a non-forfeiture option…

    1. Phyllis Shelton

      Rosemarie I’m so glad you checked in with me before taking the non-forfeiture option. I know it seems like a lot but $35.54 a month more [$120.15 – $84.61] is nothing compared to the benefits you will give up if you let this policy go. Nonforfeiture just means that Genworth will pay a claim for you at any point in the future equal to the premium you have paid in. I don’t know where you live, but home care averages $18-$21 an hour, a really nice assisted living about $4500 a month and nursing homes $6000+. What if you had to pay all those costs out of your pocket? Most people would LOVE to have a monthly premium of only $120.15 for long-term care insurance. I urge you to think of your long-term care insurance policy as GOLD and to not ever let it go. Even if you were healthy enough to qualify for a new policy, it would cost you thousands of dollars a year. So hang on to that policy no matter what, and I bet the premium stops when you have a claim. Most LTCi policies are like that, certainly for facility care and most for home care as well.

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