Navigating Long-Term Care Insurance: Premium Increases and Self-Insurance Strategies
Since 2010, long-term care (LTC) insurance providers have significantly increased premiums, impacting policyholders like a couple with a 12-year-old policy facing a 27% hike. Wealthy households with assets over $3 million might consider self-insuring by allocating $400,000, which could grow to $832,000 by age 85. This growth projection aligns with average claim durations and inflation-adjusted care expenses. Opting to relinquish an LTC policy generally hinges on the ability to manage median annual care costs of $135,500 for 2-3 years without insurance. However, households with a $3.4 million portfolio can cover these expenses, potentially requesting a reduced paid-up option from their insurance provider to maintain partial coverage.
An increase in premiums often leads policyholders to reassess their financial strategies. For one couple possessing $3.4 million in assets, a premium hike initiated a reevaluation of continuing their insurance versus self-insuring. They began the policy at age 58, paying $10,600 annually, accumulating $127,200 over 12 years. The recent 27% rate increase reflects a broader trend among insurers to elevate rates over the past decade.
Their asset portfolio includes $2.1 million in a traditional IRA, $600,000 in a Roth IRA, $500,000 in a brokerage account, and $200,000 in cash. Financial advisors often discuss how high-net-worth individuals can assume their own risk. Wes Moss commented, "If you have $3 million plus, you can self-insure. That middle ground is where it gets muddy, where you have assets but the insurance feels like a constant drain." This sentiment is echoed in consumer financial discussions, including instances of retirees facing tripled premiums.
The couple's current policy covers up to $584,000, based on $200 daily limits for both spouses over four years. Transitioning to a self-funded strategy involves reallocating $400,000 from their brokerage account into a reserve, evenly split between stocks and bonds. A projected 5% real return could increase this reserve to approximately $832,000 by age 85, when claims commonly begin. This expected return assumes investment in equities, as current bond yields are lower, around 4.67% for 10-year Treasuries.
Rising Care Costs and Strategic Considerations
The rapid rise in care costs, which outpaces general inflation rates, is a key factor, with median nursing home expenses at about $135,500 annually. Establishing a reserve sufficient for six to seven years of expenses could preserve estate capital for heirs if unused, aligning with policy benefits. For those with less than $2 million, state partnership programs in over 40 states offer asset protection with potential Medicaid alignment, although these are less pertinent for wealthier couples. It is advisable to first obtain a written reduced paid-up offer and updated premiums from the insurer. Additionally, assess geographical care costs as they vary, with some urban areas exceeding $130,000 annually.
The decision to exit a policy should not be seen as permanent, as financial situations and health conditions may evolve, especially after age 75. Revisiting the decision every few years ensures alignment with current realities. Despite broader economic concerns, household financial stability remains robust for those with $3.4 million in assets.