The takeaway: The three factors affecting your long-term care insurance costs are 1) your life-long premiums, 2) premium rate hikes, and 3) the policy’s elimination period–which even though you’re insured, requires you to pay your own long-term care costs for a certain period of time. How well you prepare, plan, and protect for these factors can determine how much you pay.
A recent article in Forbes reports that traditional long-term care policies may be cheaper and cover more of your long-term care costs than hybrid policies. Hybrid long-term care policies are sold by, and linked to, life insurance or annuity contracts. In contrast, a traditional long-term care policy is simply a stand-alone policy not linked or associated with any other insurance or financial product.
Traditional long-term care policies may initially be a financially better deal than hybrid policies, as Forbes reports. If the hybrid policy pitched to me a few years ago is any indication, traditional policies could be the better bet, as Forbes reports. However…
Hear me well!
If you go with a traditional policy, expect the unexpected when it comes to your total costs. Total costs will be determined by three factors:
- the premiums to initially buy and then renew the policy each year;
- rate-hikes, i.e. increases in your premiums over the life of the policy– which can be both unpredictable as well as substantial; and
- your policy’s “elimination period,” which is how long you will be required to pay for your own long-term care before your insurance kicks in.
If you buy a policy, AARP recommends you buy between ages 60 and 65. “
#1. Your long-term care insurance costs are affected by the initial premiums as well as annual renewals–the total of which can cost in the six-figure range.
According to the 2022 Long-Term Care Price Index, developed by the American Association of Long-Term Care Insurance, you can expect to spend close to six figures over the life of a long-term care policy you buy today. Table 1 shows what long term care premiums can initially cost you (column 2) and how much you’re likely to pay over the life of the policy (last two columns), according to the price index. The long-term care price index uses these price estimates for a policy that will pay $165,000 of your long-term care costs and increase that amount by 3% annually.
Table 1. Unless You’re a Single Man, You’re Premiums will Cost You in the Low Six-Figures Over the Life of Your Policy.
Source: The 2022 Long-Term Care Price Index, developed by the American Association of Long-Term Care Insurance (www.aaltci.org).
Note: The 2022 Long-Term Price Index assesses what insurers are charging for premiums, how much coverage they’re providing, and then, through the Association’s proprietary procedures, projects the optimal premium and coverage they believe policies can be sold for. In this case the Association projects that most people will pay the premiums listed above in return for $165,000 worth of long-term care coverage.
…you’ll likely have a difficult time getting any company to sell you a policy after age 75“
How much you pay in renewals of course depends on how long you hold the policy–which on average is 15 years. Nearly 70% of all first claims are filed sometime during folks’ late seventies or the decade of their eighties, as shown in Figure 1. Before you decide to buy a policy in your eighties or late seventies, understand that you’ll likely have a difficult time getting any company to sell you a policy after age 75.
Figure 1. Nearly 70% of all First-Time Long-Term Claims are Filed in Your Late Seventies or the Decade of Your Eighties.
Source: The American Association of Long-Term Care Insurance, 2022, www.aaltci.org.
If you buy a long-term care policy AARP recommends you buy between age 60 and 65. At that age, you can plan on paying roughly 15 years of premium renewals until you hit your eighties, when half of folks file their first claims for care. Once you begin filing ongoing claims for care, your premiums stop.
How much you’ll pay in renewals of course depends on how long you hold the policy–which on average is 15 years. “
#2. Long-term care insurance costs will include your initial premiums plus any rate hikes the insurer imposes over the life of the policy.
Traditional long-term care insurers have a history of imposing rate-hikes, some of which have been substantial. The American Academy of Actuaries reported that on average, between 2000 and 2014, rates rose by 215%, on average. Although these rate hikes have somewhat come down to earth, between 2016 and 2022, rates still rose a hefty 29%, on average.
Nonetheless, increase like these force policy holders to choose between:
- Paying the price increase;
- Canceling their policy; or
- Paying their original premiums, but reducing their coverage.
How to protect yourself from long-term care insurance rate-hikes–or at least know what to expect.
Contact your state’s insurance commissioner’s office to find out how often and by what percentage insurers have historically raised their rates in your state. Nationwide, this information is supposed to be accessible to the public.
Let me be honest…this process may make you want to rip out every last hair on your eyebrows.”
Find the information on your state’s commissioner website by typing in “long-term care insurance rate-hike approvals” or by calling and asking two questions:
- “How do I go about finding rate-hike approvals issued to long-term care insurers doing business in this state?
- And how can I tell what percentage the rate-hikes were approved for?”
Also, if you don’t get the answers–or access–you need, the National Association of Insurance Commissioners‘ hotline can assist you at: 816-783-8500, option 1 or email them at: Help@naic.org.
Let me be honest. Depending on your state, this process may make you want to rip out every last hair on your eyebrows. Although I found the process relatively painless in California, it was difficult, at best, to get meaningful information from Florida.
I see you, Florida man!
Nonetheless, given that you’ll spend close to six figures on a policy–and that’s before rate-hikes–the process might still be worth your time.
One more thing.
Relying on sales agents for this information could be dicey. First, the industry’s history strongly suggests rates will rise, regardless of what your agent tells you. Second, your sales agent has an inherent conflict of interest, given that s/he stands to earn a commission if you buy a policy.
#3. Long-term care insurance will cost the length of your policy’s elimination period, which is the number of days you’re required to pay for your own care before the insurance kicks in.
Understand that even though you have insurance, you’ll be paying for your own long-term care until you complete your “elimination period.” Your elimination period is like a health care insurance deductible. It requires you spend a certain number of days paying for your own care before your insurance kicks in.
Depending on the contract you choose, the elimination period typically lasts anywhere from 30 to 90 days, but it can go as high as 180 days. (This is typically true for hybrid policies as well.)
The good news is that long elimination periods generally result in lower premium costs. The bad news is using this strategy can tragically backfire, as happened to an older friend of mine.
The good news is that long elimination periods generally result in lower premium costs. The bad news is using this strategy can tragically backfire.”
Beware the backfire.
My friend Susan died just days before the conclusion of her policy’s 90-day elimination period. Because she never crossed the 90-day threshold, her estate, rather than the insurance company, had to pay the full cost for her care.
Those decades of paying premiums did her no good when she finally needed insurance.
Your costs for a traditional long-term care policy will include the price of your initial premium plus the price of renewing the policy for 15 – 25 years, depending on when you buy. Expect the unexpected and prepare to pay rate hikes that could be substantial over the life of your policy. You can do some sleuthing and find out the company’s rate hike history to get an idea of how much your rate might go up. However, like many things worthwhile, the process comes with some aggravation.
Should you ever need care, set aside money to pay for your policy’s elimination period. Long elimination periods can lower the cost of your long-term care insurance, but they can backfire if your policy lasts longer than you do. In that case, all those premiums you paid will have been for naught.
Forewarned is forearmed. Like my dad used to say, “growing old is not for sissies.”
Celebrate the challenge.
Because you got this.