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Supporting aging parents is an extremely difficult situation that comes with both emotional and financial complications.
The cost of long-term care insurance is a prime example.
This insurance, essential for covering costs not typically included in standard health insurance or Medicare, such as nursing home stays or in-home support, can be a financial lifeline. However, it’s not without challenges, especially when faced with an unexpected premium increase.
I know this situation all too well, having purchased long-term care policies for both of my parents in 2000.
For my dad, who was 68 at the time, I purchased 5% simple inflation protection, which accrues interest only on the original benefit. By the time my dad needed in-home care starting in 2014, his daily benefit had grown from $125 to $212.50.
Given our family history of longevity, and because my mom purchased her policy when she was a young 54 years old, we selected 5% compound inflation protection. The daily benefit with compound inflation grows quickly because the interest earns interest.
Now, with that compound inflation protection, her daily benefit has increased from $125 to $403.
But her costs have increased, too, in part because that compound inflation protection costs more. Since 2000, my mom’s long-term care insurance premium has jumped 54%, from $1,224 to $1,885 per year. Along the way, we have experienced three rate increases.
How much can long-term care insurance increase?
While rate increases can be expected, most people are shocked by how much rates can go up over the long term, specifically for policyholders who have had their policies for a decade or more. It’s not uncommon for rates to increase by 50%. However, the National Association of Insurance Commissioners has reported rate spikes as high as 500%.
For those with limited financial means, a significant premium increase can be overwhelming and devastating, often forcing people to choose between financial security and compromising their parents’ quality of life and access to quality care.
We all want what’s best for our aging parents. Here are some ways I recommend clients navigate premium increases to protect their long-term care coverage.
3 ways to handle long-term care insurance premium hikes
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A significant premium increase can threaten your or your parents’ financial stability, but so does not having the right insurance coverage. It’s a catch-22 that often leaves people feeling trapped. I don’t believe that people should be forced to choose between simply accepting the increase or dropping the policy.
The good news is that you have options that don’t result in an all-or-nothing choice.
As a certified financial planner professional, I often encourage my clients to start by exploring three options — accepting the rate increase, freezing benefits or adjusting policy terms.
1. Accepting the rate increase
In some situations, the best course of action is to do nothing. If your parents’ financial situation allows them to comfortably absorb the higher rate, accepting the premium increase can ensure continuous coverage without sacrificing any benefits.
From my personal experience, this was the best choice for my mother’s situation. Despite a 54% premium increase, we chose to accept the rate rather than settle for fewer policy benefits. I know all too well the cost of in-home care, as my dad had Parkinson’s disease for nine years and needed 24-hour care the last four months of his life.
2. Freezing the benefits
If you have financial concerns about a higher premium, you may be able to eliminate or reduce the rate increase by electing to freeze your benefits. When this happens, you agree to pause the inflation protection benefit for a predetermined time frame in exchange for a lower rate. Freezing benefits helps to keep premium costs down without losing coverage altogether. It can be a good choice for parents in their early to late 80s, especially if the premium increase exceeds 20%.
Recently, I advised one of my clients to freeze their benefits when faced with a 22% premium increase since they are in their late 70s and the cost difference wasn’t a good fit for their situation. This change allowed them to maintain the current daily benefit amount but forgo future increases, helping manage costs while still providing some coverage.
3. Finding a middle ground
Sometimes, the full premium increase isn’t manageable, but you’re not ready to freeze benefits completely. If you’re able to accept some but not all of the premium increase, it’s best to call your insurance company to negotiate your rates.
For example, if the cost is going up 15% but you can only afford 10%, discuss it with your insurer. You could uncover alternatives that an adjusted premium might offer, like a shorter benefit period, longer elimination period or reduced daily benefit amount. However, reducing daily benefits should be a last resort because it decreases the insurance payout and can increase out-of-pocket costs for your parents’ care.
Making the best long-term care insurance decisions
Age is just a number, but so is the cost of long-term care insurance. Begin by having transparent conversations with your parents and siblings, so you can work together to ensure that everyone’s needs and concerns are met. This discussion should cover everyone’s perspectives and financial considerations, especially the needs and preferences of your aging parents.
This can be a difficult conversation to navigate.
If you’re feeling stuck weighing the long-term implications of your available options, it’s important to seek guidance from a financial professional for clarity and insight. A financial expert can go over the specifics of your situation, offer tailored advice, and even suggest alternatives you might not have considered.
In the end, the decision should balance financial foresight with the care and comfort of your loved ones.
— By Marguerita (Rita) Cheng, a certified financial planner and the CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. She is also a member of the CNBC Financial Advisor Council.