When a 74-year-old client visited Ellen R. Siegel six years ago with news of an upcoming 12% rate increase on the premium of her long-term-care insurance, the adviser knew she had to navigate the potential benefit cuts with the precision of a surgeon.
The policy, originally issued by The Travelers Cos. in 1999, granted the client — a psychotherapist who was still working — five years of benefits, including a $150-a-day coverage at home or at a nursing facility after a 60-day waiting period. The client also had the annual option to add a rider that would allow the benefit to keep up with inflation.
Faced with the choice of paying a $200 rate hike, which would have brought her annual premium to $1,843.12, or dialing back benefits, the client decided that it would be best to trim the coverage by lengthening the waiting period to 90 days, reducing the daily benefit to $135 and shortening the benefit period to three years.
“She was still working, and we determined she could manage self-insuring a longer waiting period,” said Ms. Siegel, owner of an eponymous financial planning firm that manages $40 million in assets.
These days, the worst-case scenario is unfolding, as that client, now 80 and retired, recently was diagnosed with cancer. She will be undergoing surgery and could be facing up to a month in the hospital.
“I hate telling a client that, God willing, you won't need help for 90 days post-surgery, but years ago, we cut the waiting period [benefit] to drag it out,” Ms. Siegel said. “There isn't going to be any cash to pay for a private aide, because the waiting period has changed.”
Both adviser and client have run into a conundrum that's facing long-time LTC insurance policyholders: the tough choice between absorbing skyrocketing rate increases or cutting back benefits. Obtaining a new policy sometimes is not an option, as the client is now older and coverage is harder to come by.
(To read the other story in this Long-term care special report, 'Fighting for market share', click here.)
STEEP HIKES
Most major LTC insurers, including Genworth Financial Inc. and John Hancock Life Insurance Co., have called for rate increases in recent years. The latter requested premium hikes averaging 40%, and those increases began rolling out this year, pending state approval. New policies are also becoming more expensive.
Insurers have cited a variety of reasons behind their calls to raise rates. In LTC insurance's early days in the 1980s and 1990s, carriers were focused on sales volume and improperly underwrote the policies. The companies not only expected more insured people to let their policies lapse, they didn't expect them to live as long.
The low-interest-rate environment also has hamstrung carriers, as they count on investment returns to help them cover the cost of benefits paid.
“The products today are written more conservatively than they were 10 years ago,” said Carl Austin, assistant vice president at A.M. Best Co. Inc. “The expectation of investment returns are also very different, and most companies have taken some action to increase rates.”
Even if the rate increase comes when the client is in his or her 50s, advisers still have to decide whether to keep the policy or shop for a new one.
“If the company asks for the rate increase when you're 55, there's a lot of risk that they can go back and ask for another increase in a few years,” said Todd Parker, president of long term care at Lenox Advisors Inc.
Two of Mr. Parker's clients, a married couple in their 50s, were recently notified of an 18% rate increase on their MetLife Inc. LTC policies. To maintain their current premiums, they had the choice of dropping their benefit period from 10 years to seven or reducing the inflation protection from a compound 5% interest to 3%.
The investors bought the coverage about four years ago, and the hike was going to bump their combined annual premiums to $4,500.
Mr. Parker decided to go with the devil he and the clients knew: paying more for coverage. Shorter benefit periods might hurt them if they develop a chronic illness such as Alzheimer's disease. Meanwhile, inflation in-evitably will get worse, and the policy needs to be able to keep up with the rising cost of care.
Financial advisers opt to brace the client for paying more if they are unable to secure new coverage. Some advisers ask clients at the time the policy is initially taken out if they'll be able to withstand a 15% to 20% rate increase down the road. An increase in the higher double digits isn't necessarily anticipated, however, and could be hard to handle without a trim in benefits.
“People react differently to a 40% increase versus a couple of years of 15% rate increases,” said Tom Hebrank, a LTC specialist at Advanced Planning Solutions Inc., which acts as a consultant to advisers. “I've seen situations where people are just strapped and [they end up] cutting the number of years of coverage.”
LONGER WAITING PERIODS
Given a choice, he suggested lengthening the waiting period for care to kick in or reducing the daily benefit.
Financial planner Bill Goldsmith of LifeTime Financial Strategies LLC has walked clients through increases as high as 30% and recommended that they keep the coverage. The policies were inexpensive to begin with, and some states phase in rate hikes over time, so the increase isn't as traumatic.
“The policies were more cost effective than what the client could get in the marketplace,” Mr. Goldsmith said.
Some insurers have created options to make rate hikes or benefit reductions more palatable. John Hancock, for instance, created an option to keep the premium the same but to reduce the inflation protection to 3.2%, from 5%.
“It's not a great thing to do to your policy, but if you're tapped out, it's a way to avoid drastically changing it,” Mr. Parker said.
In Ms. Siegel's case, the experience of a client's not having the coverage immediately at hand has made her change her approach to recommending LTCI.
“A client in the midst of a challenge suddenly wants the insurance to be there right away,” Ms. Siegel said. “I wish I knew to put more into the conversation besides money and risk assessment. If I had a do-over, I would have this story to tell to engage an emotional reaction.”
dmercado@investmentnews.com
