I Just Got a Rate Increase on my Long Term Care Insurance Policy (Part 2)

            Last week I was telling you about a call we get with increasing frequency.  Jim received a letter notifying him of a rate increase of 60% on his long term care insurance premium.  He wanted to know what he should do.

            The letter explained that the increase is not based on a change in Jim’s age, health, claims history or really anything specifically about Jim.  The reason for the increase is that the insurance company underestimated the number of claims and the amount paid out on those claims when it set the premium at the time Jim purchased the policy.  In other words, it must raise the premium to be sure it will have enough money to cover future claims.

            The insurance company can’t do this unilaterally.  It must get approval first from the New Jersey’s Department of Insurance.  Often times, the State will approve a smaller increase or will grant the desired increase but spread over a period of several years.  The State also requires the insurance companies to offer their policyholders options rather than simply raising the premiums.

            Let’s go back to Jim’s letter.  He currently has a policy that provides a benefit of $300 per day for up to 4 years to cover his care at home, in an assisted living facility or in a nursing home.  His policy has an inflation rider of 5% simple, meaning that every year the daily benefit increases by $10 (5% of $200, the original daily benefit he purchased).  His current premium is $2400 per year.  To keep the same coverages he must now pay $3840 per year.  Jim has been offered several options.

            Option 1A is to reduce his inflation protection to 1% simple.  That means that every year his daily benefit will increase by $2 instead of $10.  Over time that will erode his coverage because long term care costs are increasing at a much higher rate, by some calculations as much as 5% to 7% per year.  Nevertheless, taking this option means that Jim will avoid the premium increase.

            The insurance company has also offered Jim an Option 1B which enables him to avoid half the increase if he reduces the inflation rider to 3%.  That means his premium will jump 30% but his daily benefit will increase by $6 each year.

            Option B allows Jim to essentially redesign his policy to reduce the premiums he will pay.  He can call the insurance company to discuss options that may be available to reduce his daily benefit, the inflation rider, the elimination period (waiting period before benefits start), or the type of care covered.  In this way he may be able to reduce his premium to an amount close to what he has been paying.

            Option C is a limited benefit that does not require Jim to make any more premium payments.  It is a paid up policy that provides total coverage under the existing limits of Jim’s policy up to the amount of premiums he paid.  If Jim has paid $2400 per year in premiums for 10 years, under this option he has $24,000 of long term coverage payable at $300 per day.  In other words, if he decides the increased premiums make the policy unaffordable and he drops it, the insurance company must at least give back his premiums in the form of long term care coverage.

            None of these options, however, allows Jim to keep what he thought he had bought and locked into10 years ago.  So what should he do?  The tendency for many who find themselves in Jim’s shoes is to focus on the premium and take option 1A.  However, Jim chose his original coverage amount because he determined that this was what he needed to protect himself.  Simply focusing on keeping the cost down leaves him unprotected.

            There is another greater danger to consider and I’ll share that with you next week.