Long-term care planning, and, in particular, long-term care insurance (LTCI) is getting a lot of attention recently with gender-based pricing just around the corner. If you haven’t heard by now, Genworth, the leader in the LTCI industry, will be changing the rules of the game beginning in April when it charges higher premiums for single women on new policies.
Window of Opportunity
This development, together with Genworth’s announcement last Wednesday that it’s suspending sales of LTCI in California effective March 21st, has the industry abuzz and the public scrambling to find and implement solutions to quickly meet their needs. Genworth’s latest announcement came in response to the company’s introduction of a new product with higher premiums and reduced benefits.
When Genworth’s new product is approved in California, which could take several months, consumers in the state will see premiums on new policies jump substantially compared to what’s available today. It’s anticipated that the increases will be in the range of 20% – 40% or higher in some cases. This will apply to men and women, although single women will be hit the hardest as a result of gender-based pricing.
Potential Alternative to Inflation Protection
The purchase of LTCI, unlike life insurance which is generally straight forward, is complicated by the a la carte approach that’s prevalent in the industry. The details of this approach, which are beyond the scope of this post, allow you to pick and choose a combination of variables, including, but not limited to, benefit amount and length of coverage, in order to customize a policy to meet projected needs. One of the important options is inflation protection, with 3% or 5% simple or compound and cost of living being common choices.
Inflation protection, especially 5% compound, significantly increases the cost of LTCI. If you’re 50 years old today applying for a policy with a daily benefit of $150 and 5% compound inflation and you experience a qualifying long-term care event when you’re 80, your insurance company is on the hook for a daily benefit of $650 after you satisfy the policy’s elimination period, or deductible. An alternative to this approach to reduce your premium is to increase the amount of your daily or monthly benefit and include a future purchase option (FPO) when you apply for LTCI.
What is a Future Purchase Option?
A future purchase option gives you the right to purchase additional coverage without evidence of insurability at specified intervals in the future at an additional cost based on your attained age. The amount of coverage is typically calculated using a compound inflation factor based on your original benefit amount. The number of available options, date of availability to exercise your first option, and number of years between exercise dates are dependent upon the terms of each policy.
A FPO, like many things, has its pluses and minuses. On the positive side, it allows you to start out with lower premiums compared to a comparable policy with built-in inflation and grow into a richer benefit with higher premiums later. Offsetting this are three disadvantages:
- Due to the limitation on number of available options and the fact that they’re generally front-loaded in the early years of a policy, you generally won’t be able to match the benefit that you would receive with built-in inflation many years down the road when coverage is more likely to be needed.
- If you could match the coverage of a policy with inflation coverage, the cumulative premiums that you will pay will be significantly greater than a comparable inflation-based policy without a FPO.
- Assuming that you purchase a LTCI policy with a FPO when you’re in your 40’s – 60’s and won’t need the coverage until you’re in your later 70’s or 80’s, you will need to purchase one or more additional policies in the future when you may not be insurable and the premiums will be more expensive or plan to potentially pay a sizeable amount of out-of-pocket expenses compared to a policy that includes inflation protection.
The inclusion of a future purchase option vs. inflation protection in a LTCI policy is in most cases a short-term cost decision. While benefits will generally be much less when claim time rolls around, so will one’s annual premium. It allows individuals who otherwise wouldn’t purchase LTCI to get some basic coverage and, as such, can be a reasonable practical alternative. Buyers beware – you get what you pay for.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.