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 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.
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.