How Long-Term Care Insurance Policies Backfire

Written by Richard Eisenburg for Next Avenue

Some people protect themselves from the exorbitant out-of-pocket cost of long-term care (median annual price of a private room in a nursing home: $91,250, according to Genworth Financial), by buying long-term care insurance policies. But here's some stunning news during what the long-term care industry calls Long Term Care Awareness Month: More than a third of people with long-term care policies at age 65 lapse their coverage before they die, forfeiting all benefits, a new Center for Retirement Research (CRR) at Boston College analysis finds.

Even worse: many of these people are letting their policies lapse just when they need them, says Anthony Webb, a senior research economist at CRR and one of the co-authors of the study.

A Lesson for Policyholders and Families

Worse still: Lapses are common among the cognitively impaired — presumably because they aren't even aware they haven't paid the premiums, which caused the policies to fizzle. And this finding, I think, offers an important lesson for long-term care policyholders and their families. I'll get to that momentarily.

But back to Webb's work: "I came across Society of Actuaries data that showed an annual lapse rate of 1 to 2 percent and thought that's not low actually, because contracts are very long term," said Webb. You purchase long-term care insurance in your 60s, he noted, and anticipate using it in your 80s. "If there's a 1 or 2 percent risk of lapse every year for 20 years, it builds up."

Webb wondered, he said, "what percentage who purchase them actually stay the course — and I did the math."

Webb expected to find a lapse rate of about 10 percent over a lifetime. He was stunned to find that men and women at age 65 have, respectively, a 32 percent and 38 percent chance of lapsing prior to death. (It's higher for women because women live longer.)

What Knocked This Researcher's Socks Off

Something else Webb discovered really knocked his socks off.

"I did a simple cross-tab between people who lapsed versus people who subsequently went into long-term care and found to my astonishment that people lapsing were more likely than non-lapsers to go into care subsequently," he told me.

In other words, generally speaking, people who let their long-term care insurance policies lapse don't do so because they've decided they won't need the coverage and just want to stop paying for premiums. That would be what Webb calls "strategic lapsing."

Instead, he found, poorer people are more likely to lapse than others, which makes sense since they're the least able to afford the premiums. Webb calls these "Financial Lapsers." (The cost of premiums varies enormously depending on your age and the coverage, but a healthy 65-year-old couple might pay $3,600 or more a year for $165,000 of benefits, according to the American Association for Long-Term Care Insurance.)

The Sad Tale of 'Forgetful Lapsers'

But Webb thinks one of his most important findings was how common lapses are among the cognitively impaired — the group he calls "Forgetful Lapsers."

"People who suffer a cognitive decline have trouble remembering to pay their bills and one of those bills can be for long-term care insurance," he said. "Then, the premium doesn't get paid. And these are the very same people who are likely to go into long-term care due to cognitive impairment."

Trying to buy a new policy after a long-held one lapses can be problematic, if not impossible. The new premiums will likely be much higher, you might be turned down for coverage and the benefits almost certainly won't be as generous as those of policies sold years ago.

Beth Pinsker of Reuters recently wrote among people applying for long-term care insurance, 27 percent of those age 60 to 69 and 45 percent of those in their 70s were rejected for health reasons. And Gregory L. Olsen, a partner at Lenox Advisors, told Gregory Iacurci of InvestmentNews that trying to reinstate coverage after a lapse would "likely be more expensive or result in a loss of benefits."

How the Long-Term Care Insurance Industry Responded

Webb told me that the insurance industry "pushed back quite hard" after he released his report on lapses. They told him that there's a safeguard in place to ensure premiums get paid: The policyholder can ask for premium notices to be sent to a trusted friend or relative.

The key word in that last sentence is "can." It's not "must."

Webb's view about this safeguard: "The data clearly shows it's not working. The policyholders are either not finding a friend or the friend isn't close enough to be sure the premium gets paid."

Lessons for Current and Future Policyholders

And that takes me to the lesson from the tangle Webb uncovered: If your parents or a spouse or a close relative has a long-term care policy, be sure someone else (maybe you) gets the notices that premiums are due and then sees that the premiums get paid.

Similarly, if you have, or plan to buy, a long-term care policy, find someone you can count on to get those notices for you and to be your backstop to ensure the premiums are paid.

"Everyone should have a plan in place," says Webb.

And a request to financial advisers whose clients have long-term care policies: Please make part of your job knowing that those premiums are being paid, especially if your clients show any signs of cognitive impairment.

Webb has one other tip that's particularly important because long-term care premiums rose 8.6 percent last year, on average, and some insurers increased premiums much more: "Only take out a long-term care insurance policy if you're confident of your ability to afford premiums over the long haul.".