Personal Finance: Those in need of long-term care face financial dilemma

photo Chris Hopkins

Contemplating a future disability is daunting, but the simple fact is that such an eventuality is extremely likely. According to AARP, 68 percent of Americans over age 65 will experience a significant disability or cognitive impairment during their lifetime that could threaten their financial security.

Financial planners and insurance representatives responded appropriately in encouraging clients to secure long-term care coverage to provide resources and protect financial assets in case of such disability. But a confluence of forces has shifted the landscape for providers of disability coverage, the result of which is higher premiums for policyholders. If you haven't already seen a big rate hike, gird up your checkbook.

Many people mistakenly assume that Medicare covers disability. Other than very limited benefits for a short period of incapacity, seniors are on their own. Private insurance companies entered the breach, offering generous benefits to buyers of long-term care policies. However, these insurers soon discovered that some of their basic assumptions were incorrect. In particular, extended life expectancies and lower investment returns rendered many policies unprofitable. Furthermore, fewer customers allowed policies to lapse than the actuaries predicted, accruing higher liabilities than expected.

The result has been an exodus of insurers from the marketplace. Ten years ago, over 100 companies sold significant numbers of long-term care plans; today that number has shrunk to just 12. The survivors will need to beef up premium revenue and reduce coverage going forward.

Just how intractable the long-term care cost issue has become can be observed in the early changes to the healthcare reform act. The President was forced to kill the disability provision in Obamacare, once it became apparent that the cost made it impracticable.

The bottom line is that long-term care policies were consistently underpriced for more than 20 years, and it is now time to pay the piper. Customers will be faced with crucial decisions regarding whether to renew their policies at higher rates, to accede to less generous benefits, or to drop coverage altogether.

Notices of premium hikes of 25 to 75 percent are not unusual in order to maintain existing coverage. Typically, the rate notification includes other options to mitigate part of the rate increase, like accepting diminished benefits. This might mean shortening the coverage period (say, from 10 years to five years) or eliminating or reducing the inflation protection that bumps up coverage as medical costs increase over time.

If you receive a notification of premium increase, contact your provider or agent to discuss alternatives. Shortening the coverage period might be the best choice, especially if you have an older policy with generous terms. Reducing or eliminating the inflation escalator might also help, if it keeps the coverage affordable.

Should you decide the coverage is simply not affordable, you might consider a fixed annuity to pay benefits for a period certain should you experience a disability; this approach carries the additional advantage of a survivor benefit should you never become disabled.

The environment has shifted since the advent of long-term care policies, and insurers are being forced to adapt. When your notice arrives, contact your agent to explore the various options for maintaining coverage.

Christopher A. Hopkins, CFA, is a vice president for Barnett and Co. in Chattanooga.

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