The Brewing Storm in Long-Term Care Insurance

Don’t look now, but there may be a storm brewing when it comes to long-term care insurance. Facing substantial budget shortfalls, some states are cutting back on Medicaid and long-term care services—shifting more of the burden of long-term care onto consumers.

At the same time, the long-term care insurance industry is experiencing challenges that could result in more expensive coverage and tighter restrictions.

According to the American Association for Long Term Care Insurance (AALTCI), prices for new policies increased by as much as 17 percent in 2012. The AALTCI, which analyzes costs for the most popular policies offered by 10 leading insurers, notes that a 55-year-old couple can expect to pay $2,700-per-year (combined) for about $340,000 of current benefits, which will grow to over $700,000 of combined benefits when the couple turn age 80, thanks to compound inflation growth factored into the policy.

What Happened?

Industry observers say that many insurance companies have experienced losses from policyholders who have lived longer than expected and began filing claims at earlier ages than insurers had predicted.

Another challenge has been low interest rates. Yields on insurers’ fixed-income investments have been meager over the past several years.

As a result of these challenges, some traditional insurance providers have exited the long-term care market, while others are tightening up on the benefits they offer new policyholders. Instead of generous lifetime benefits, new coverage may come with a cap on how much the policy will pay out over the insured’s lifetime and/or how much it will pay per day or month. Other insurers are no longer offering inflation protection riders, which increase the dollar limit on daily benefits each year to protect policyholders from rising healthcare costs.

What You Can Do

Premiums for long-term care insurance are based in large part on your age and health when you buy the policy. Therefore, it may be prudent to purchase coverage when you are younger and (presumably) healthier.

You may be able to take advantage of tax incentives offered by the federal government (and some state governments) for purchasing long-term care insurance. Tax-qualified long-term care insurance policies are considered to be a medical expense. If your medical expenses exceed 7.5 percent of your adjusted gross income (AGI), you could be eligible to deduct long-term care insurance premiums if you itemize deductions. The amount of premiums you can deduct is based on limits set by the IRS and increases with age. For instance, deduction limits for individuals range from $350 for individuals age 40 or younger in 2012 to $4,370 for individuals age 70 or older.

When considering long-term care coverage, the AALTCI recommends careful comparison shopping. Policy prices in some categories vary by as much as 132 percent, and no single insurer always has the lowest or the highest rate in any given category.


Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

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