How To Handle Long-Term Care Premium Increases

(MoneyWatch)  If you have a long-term care insurance policy, get prepared for possible rate increases as insurers are recognizing that ageing is a lot more expensive than anticipated.

Over the last few years, many insurance companies have been raising the premiums on their long-term care contracts. The increases have applied not only to new policies but also to those with existing contracts.

• Increases have often been in the range of 10 to 20 percent. For instance, there was a recent article in The Investment News about a 25 percent increase in long-term care premiums for federal employees.
• If you're interested in getting more details on increases, consider visiting your state insurance department website. California and Texas, for example, both list carriers that have increased premiums in their states and by how much. You can also call your carrier and ask for a list of any policy increases.

What's Going On? The main problem is that insurers don't have a long history of estimating the cost of ageing. Although insurers are trying to project how much long-term care the average policyholder may need, they're discovering that people are using more services than they budgeted. Here are a few of the main problems:

• People continue to live longer and they're living with more disabilities. Thus, the cost of caring for them continues to rise and significantly outpace inflation.
• Insurers often rely on a certain number of policy owners dropping their policies before they actually use any benefits. For instance, many people drop their life insurance policies as they age. That means the insurer was able to collect premiums but never had to pay a claim. But with long term care, the policyholders are keeping their policies. This means that more people are accessing care and the claims costs are rising for the insurers.
• The financial markets haven't helped either. As stock and real estate values tanked, insurance companies have lost money on their investments. They're just like the rest of us. As those earnings have declined, it creates more financial pressures because the insurers can't use investment gains to pay for some of the cost of care.

Increases. To avoid running into future funding problems, insurers are proposing rate increases. The increases generally have to be approved by state regulators. And regulators often approve the increases because they can see that the insurers aren't collecting enough premiums to pay anticipated benefits. If they don't allow for increases, then the insurers could be at risk of failing to pay claims. So the only solution is often to approve a rate increase.

What Can You Do? If you get hit with an increase, you generally have several options that would include paying the higher premium, adjusting benefits, looking for a new carrier or getting a paid-up policy.

• If you need the coverage and your carrier is in sound financial shape, then consider paying the higher premium. To make room in the budget, see if you have other insurance premiums you can reduce, such as eliminating or reducing the coverage on an old life insurance policy or increasing deductibles on your home or auto policies.
• If you can't afford the increase, then you may have the option to reduce your benefits. So instead of a $150 daily benefit, maybe you can get a $130 daily benefit for the same cost, or you go from a 90 day wait to a 180 day wait.
• If you're in good health, then you could consider looking for a new carrier. Because you're older and haven't been paying premiums to the new carrier, expect that your premium will rise. But, if you don't feel comfortable with your current carrier, then talk to your agent about seeking new coverage.
• And finally, you may have the option of getting what's called a "paid up" policy. Basically, you stop paying future premiums and the insurer gives you a policy equal to the benefits you have already paid for. The benefits will likely be much less than the coverage under the full policy, but you may be able to salvage some coverage.

Bottom line. The pressure facing long-term care insurance companies is a reflection of the increasing costs of ageing. It's going to be more expensive for all of us to take care of ourselves, and we'll need to budget accordingly.

Prior to making any decisions, make sure you talk to your advisor or agent about how to handle any proposed increases or changes in policy structure.