As premium hikes on long-term care policies go, this one was the sharpest advisor Laura Steckler had ever seen. Her client, a 65-year-old small business owner, was facing a startling 88% increase that would gradually raise her current annual payment of $2,400 to more than $4,500 in three years.
Understandably upset, the client wanted to discuss how best to handle the increase, Steckler, an advisor with Raymond James' Steckler Wealth Management Group in Coral Gables, Florida, said.
The woman was one of countless other clients Steckler had encountered who too received dreaded notices of premium increases from their insurance carriers. In them, they were informed of the increase and given options if they refused to accept the premium hikes. In lieu of a premium increase, policyholders could, for example, reduce their benefits or in a worst-case scenario terminate their policies.
Steckler strongly recommended that her client absorb the premium increase as she had developed medical issues and would likely need to draw on her long-term care benefits.
"Maintaining her existing coverage was key," Steckler said.
The first thing advisors should do when clients are notified of an increase is look at their insurability based on their age and health, according to Renee Larson, vice president of Life and LTC Sales at Raymond James Insurance Group. "If they're insurable, we go out to the marketplace and look at options," she says.
Had Steckler's client been healthier and therefore more insurable, Steckler might have suggested replacing her current policy with a life insurance policy that provides long-term care benefits. Such hybrid policies have become popular because benefits and more importantly, premiums, are guaranteed. With a hybrid policy, Steckler's client would never have to worry about another premium increase again.
Unfortunately, due to Steckler's client's medical illnesses, she would not be able to get approved for a hybrid long-term care policy, Steckler said.
Advisors generally advise clients to swallow the premium increase and maintain their current level of benefits if, like Steckler's client, they can afford the increase.
"Even after rate increases, it would likely be impossible for an individual to buy a policy with the level of benefits they currently have at the same price," said Tim Dona, head of Insurance and Annuities at U.S. Bank Wealth Management.
The only time they might consider reducing benefits is if they've over-purchased insurance, according to Larson. If a policy covers $350 a day, a client might consider lowering the benefit amount as the average cost for long-term care is $200 a day.
"Maybe in that instance, reducing your benefit wouldn't be a hindrance," Larson said.
Regrettably, some clients may have no choice but to reduce benefits if they can't afford the premium increase. Apart from reducing the daily or monthly benefit amount, they may, for example, reduce the benefit period, increase the waiting period or change the inflation rider by dropping the percentage from let's say 5% annually to 4% annually or switching from compound to simple inflation.
Inflation riders are usually the first to get dropped or reduced, according to LTC experts. One of Steckler's clients, a 77-year-old widow, recently decided to remove the 5% inflation rider on her policy to keep the premium manageable.
"One of the most expensive components of a long-term care policy is the inflation rider," said Steckler.
Whichever way they decide to reduce benefits, clients should make sure they are comfortable with the modifications as they cannot be undone. "Once coverage is reduced, it likely cannot be increased," Dona said.
Clients can, of course, choose to terminate the policy — an option that advisors rarely recommend and clients almost never take as a policy cannot be reinstated once it lapses.
"This is rarely a good option for an overall financial portfolio," said Dona.
Clients who can self-insure their long-term-care costs could make a case for abandoning their policy, according to some experts. "If someone had the ability to self-insure, it wouldn't be detrimental to their retirement but it's always smarter to use leverage," said Larson.
Before clients decide to stop paying premiums, they should find out whether their policies have non-forfeiture options allowing a certain level of benefits to continue based on what they have already paid in, said Dona.
In making their decisions, clients should keep their emotions in check, according to Larson. Even though clients may be upset about premium increases, they should "sit down and look at the actual facts," she said.
"We like to run the numbers side-by-side to show where the breakeven is," Larson said. "We want to make sure that the client understands what they're getting and what they're giving up and what the trade-off is."