Archive for March, 2014

An Interesting Phone Call…about rate increases

March 16, 2014

While staring at my computer screen, wondering what to write about for this eNewsletter, the phone rang. A long-time life insurance client (from before I began specializing in long term care planning) was on the line. She had since moved to another state and had purchased long term care insurance from another agent. “It is OK”, I told her, “You didn’t know my insurance practice had changed back in 2001.”

Her question: The agent who had sold her long term care insurance was nowhere to be found, and my client had just received notice of a rate increase. “What should I do?”, she said.

We talked for a while. Her policy was about eleven years old…which meant she was eleven years closer to needing long term care services. She wanted me to help by replacing her policy with a newer one.

I explained that replacement did not make sense because a new policy with similar benefits, would cost more than her existing policy…even with the rate increase added.

This was because 1) my client is now older than when she bought her existing policy, thus making a replacement policy even more expensive (because policy cost is based upon age at time of application) and, 2) rates for new policies have increased during the intervening years because of much lower than expected interest rates, higher than expected claims, and lower than expected policy lapses (once people have a policy, they don’t give it up.).

My next question to her: “Can you afford to keep your policy, even with the rate increase?” She said, yes, she could, but would not like paying more. My client expressed understandable anger toward the insurance company.

I told her she had three choices:

  1. She could demonstrate her anger by cancelling the policy. “That will show them”, I said. “However, the insurance company will be happy to have collected premiums for eleven years and now to be completely off the hook. There can never be any benefits paid if the policy is cancelled.”

  2. If indeed affordable, she could accept the rate increase.

  3. If the rate increase makes the policy unaffordable, she could reduce her benefits so as to reduce or eliminate the increase.

A question for you, reader of this eNewsletter: What do you think she did? Your responses will be welcomed. I will publish her answer in next month’s issue.

Some background: Rates for today’s in-force long term care insurance policies can only be increased on a “class basis”. This means that an individual cannot be singled out for an increase no matter what.

Instead, an insurance company seeking an increase for a large number of policies (a class), must first attempt to justify that request to the appropriate state department of insurance (Division of Insurance in Colorado). A rate increase request may be approved, partially approved, or not approved at all. Virtually all older long term care insurance policies were under-priced (really!).

As more data about claims and policy cancellations has been collected, and as the lenthy low interest rate environment has taken hold, insurance companies have been better able to price their policies. This is why older long term care insurance policies have suffered the largest rate increases.

Will there continue to be rate increases in the future? I think so. But policies issued today are far less likely to experience the large increases of the past.

This is because 1) Interest rates are unlikely to go any lower. 2) Insurance companies now have a much better handle on claims. 3) Cancellation (lapse) rates are now assumed to be very low. If lapse rates or interest rates were to increase, there would be less reason for insurers to request rate increases.

Disclaimer: This eNewsletter and all links to other sources should not be construed as tax or legal advice because they are neither. Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice. Consult your tax advisor or attorney for these matters.

© Raymond Smith, The Long Term Care Specialist, 2014

You Must Have A Plan Because…

March 16, 2014

You do not necessarily need to buy a long term care insurance policy. Insurance is not appropriate for people with few assets or little income. But you must have a PLAN to pay for long term care services when you or your loved one needs help in getting through the day. Here is why:

Without a plan: When a crisis happens (and it will), your options will range from very limited to none at all. You will not be allowed to give away (gift) assets in order to qualify for Medicaid because of the five-year look back rule. The same five-year restriction applies to transferring your things to a trust. You will not be able to buy long term care insurance in a medical crisis because you will have become uninsurable.

Pay for unplanned long term care with your investments? Weren’t you going to leave those assets to a particular charity? Or wasn’t your investment portfolio intended to provide an income for your spouse? Oops…no investment assets equals no investment income. Lack of choices about care: You will be forced to accept whatever care can be provided by public assistance (Medicaid), by your rapidly shrinking net worth or by imposing upon family and friends.

With a plan: You can receive care where and how you want. You would like to remain in your own home? That can be easily planned for. Your adult child can become your “Manager of Care” instead of your hands-on caregiver…and what a difference that will make! The money to pay for care will either materialize (if your plan includes pre-purchased long term care insurance), or can be accessed in the form of assets you had previously earmarked for liquidation.

Not so good, but better than no plan at all, plans:

Plan #1 calls for a daughter, daughter-in-law, or other family member becoming your caregiver: Inevitably creates resentment among siblings because of the actual and perceived unequal workload/amount of sacrifice. Requires family caregiver to put her (is usually a “her”) life on hold. Assistance with bathing, toileting and other daily functions is provided by a family member instead of by a caregiving professional. Personal note: I do not want my daughter bathing me, and I do not want to disrupt her life. Better than no plan at all because: You have had the conversations before care was needed and everyone knows what is expected.

Plan #2 has you spending down most of your assets until qualifying for Medicaid: Almost all that you and/or your spouse own will be spent. Your care will then be provided by the Federal/state public welfare program known as “Medicaid”. This will usually be a semi-private bed in a Medicaid nursing home. Reimbursement to Medicaid long term care providers is less than the average cost of providing care. Thus by definition, you will receive below-average care. Better than no plan because: Assuming Medicaid survives as we know it today (I do not expect it to.), you will also know what to expect.

Disclaimer: This eNewsletter and all links to other sources should not be construed as tax or legal advice because they are neither. Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice. Consult your tax advisor or attorney for these matters.
© Raymond Smith, The Long Term Care Specialist, 2014