Even The Premium is Risky in Long-Term Care Insurance

with No Comments

It makes sense that emergency medical expenses are a leading cause of credit card debt, bankruptcy, and retirement failure. Major medical expenses are normally unexpected. Because they are not occurring regularly, many fail to budget for them. However, you can budget for your own health care costs.

Each of us must make the decision whether to self-insure or get long-term care insurance. Periodically, insurance salespeople have set up billboards suggesting that if your financial advisor does not recommend long-term care insurance you should sue them. We are still not fans of long-term care insurance. If you can self-insure, you will likely be better off.

By default, we would recommend that you strive to self-insure long-term health insurance coverage.

I said as much in the 2004 article “Long-Term Care Insurance Is Too Risky And Too Expensive.” Since then, this article has been quoted by many different financial advisors in defense of self-insuring.

We think most long-term care insurance policies are overly expensive and unnecessarily restrictive. Policies are often sold based on purposefully misleading statistics and last as little as 3.1 years despite being called “long-term.”

Now, I have discovered there are even more reasons to avoid Long-Term Care Insurance.

They can increase the premium later.

In the fantasy of long-term care insurance, for a small premium now you can insure against high medical costs later.

However, long-term care insurance policy premiums are usually subject to a “limited right to change premium provisions.” This right is put into policies by the insurance company.

With this right, they are allowed to sell long-term care policies today. Then, later they can calculate the actuarial projections of future claim costs. If those future costs are high than expected, they can petition the state to receive a sharp increase of premium payments .

As Genworth Life Insurance (a company based here in Virginia selling long-term care insurance) states in their long-term care frequently asked questions :

I’ve been paying for this policy for years. Are you raising premiums because now I’m older and more likely to need my benefits?

No. Premium increases are not due to a change in individual health, age or claims history. Long term care insurance companies are only permitted to increase premiums on a group of policies that have similar characteristics and benefits, and that are issued in the same state on the same policy form. Premium increases are based on actuarial projections of future claims costs, which demonstrate that a rate increase is warranted.

In other words, they say, “No, we aren’t raising premiums because you are older. We are raising premiums because everyone to whom we sold a policy in your state using the same insurance form is older.”

They will increase the premium to profit.

This is a bad deal for you. If a company charges too much for insurance, they get to keep the massive profits. If a company charges too little, they petition the state and get to ensure profit from their insurance again.

Again, here is their answer on their page asking, “Why are you increasing my premiums?

Why premium increases on long term care insurance policies may be necessary

Over the lifetime of a policy, most premium dollars will be set aside to pay future claims. Remaining premium dollars are used to cover commissions, expenses and earnings. Although long term care insurance is originally priced to generate a profit, if claims are higher than expected, insurers may experience losses – which is the case for many of the products for which we are seeking premium increases.

There are so many things wrong with this answer.

If you are on the page “Why are you increasing my premiums?” you have already deemed that premium increases are necessary. To say they “may be necessary” is hedging a certainty. This is already a misleading answer.

To say that “most premium dollars will be set aside to pay future claims” only means that over 51% of premium dollars will be set aside to pay future claims. There is no indication that future claims account for any more than “most.”

The phrase “Remaining premium dollars” makes it sound as though they are holding these dollars in case they are needed. This is also false. Commissions have already been paid; expenses have already been incurred; and earnings have already been reported and sent to shareholders. None of these premium dollars still remain.

Perhaps the most important thing to bear in mind for all insurance is “long term care insurance is priced to generate a profit.”

In the case of long-term care insurance, even if insurers get their actuary tables wrong and misprice their product, they can go back and reprice their product such that they again profit.

Add this to the list of reasons to avoid long-term care insurance and strive to self-insure.

Photo by CDC on Unsplash

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.