Monday, April 09, 2012

Long Term Care Insurance Is Getting More Expensive

My in-laws purchased long term care insurance long before it became popular. Even then it wasn't cheap. My father-in-law stayed at home as long as possible when he was dealing with terminal cancer. It nearly broke my mother-in-law's heart to send him to a care facility when he could no longer be adequately cared for at home, but she had little choice.

Mom was, however, grateful that they had insurance to cover Dad's stay at the care facility. She didn't have to worry about how she was going to cover the cost. As it turned out, Dad passed away two days later with Mom holding his hand telling him that it was OK for him to move on. Although my in-laws recouped only a tiny portion of the premiums paid for the long term care insurance, Mom felt that the peace of mind it afforded was well worth the cost.

I thought about this important episode in my family's history as I read this WSJ article about long term care insurance.

The entire point of insurance is to manage risk. The price of the premium is directly tied to the calculated risk of pay out. Premiums are lower for events that have little chance of happening and higher for events that have a high degree of certainty. Premiums are also directly tied to the potential pay out amount. It costs less to insure for a flat tire repair than it does to insure for the destruction of a home, for example.

The long term care insurance industry has undergone some major business factor shifts in recent years. People are living longer and needing more end-of-life care. The aging Baby Boomer population is lining up to place far higher demand on the care industry. While the industry can and will flex, the resources that can be brought to bear are expected to be scarcer than for the previous generation.

The insurance industry invests excess premiums, expecting that the returns on those investments will help finance the eventual pay outs. No one expected interest rates to be kept so low for so long. The industry has been scrambling to absorb the new reality of investments returning very small value increases.

All of these factors ultimately mean that long term care insurance is costing more than in the past. Industry observers expect rates to continue to rise and insurance companies to become increasingly picky about who they will insure.

Not all of the news is bad. New care options have become available and are continuing to be developed that may potentially reduce costs and provide customers with more flexibility than in the past. But insurance companies still have to make a profit. Even as they raise premiums, they will try to control costs by seeking lower risk customers and by more carefully defining benefits.

The WSJ article suggests selecting the 5% inflation rider and going for a shorter benefit period (around three years) with a higher daily payout when buying LTC insurance. Opting for a policy that allows for direct cash pay out is also suggested. It seems to me, however, that the market is still somewhat in flux and that today's assumptions may still need to be modified in a few years.

While long term care insurers are looking for lower risk customers, people like me haven't been able to buy LTC insurance for years. Although I'm one of the healthiest people with Multiple Sclerosis that I know, the fact that I have this potentially debilitating disease precludes me from buying this type of insurance.

Oddly enough, this is largely true for life insurance as well; although, the death rate for people with MS is not much different than that of the general population. Many life insurers simply refuse to cover people with MS. Those that offer such coverage charge cost prohibitive rates.

When the time is right we will be looking into long term care insurance for my wife. But my best options for LTC and life insurance are to self insure as much as I can and to take as good of care of my health as possible.

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