An essential element of retirement income planning is long-term care planning.
Physical and cognitive long-term care events are commonly experienced in the latter stage of life. In addition to the physical and emotional strain placed on caregivers and family relationships, the cost of care for an extended period is financially draining in the best of situations, with financially devastation a distinct possibility without proper planning.
In order to be effective and cost-efficient, long-term care planning should ideally be discussed and coordinated with professional advisers and family members during one’s 40s and 50s — long before care is generally needed.
Current window of opportunity
When planning for long-term care, one of the things that should be analyzed is the need for long-term care insurance, including its place in a long-term care and retirement income plan. Given the fact that the long-term care insurance industry is relatively young and pricing models are still evolving with the industry’s experience with claims, policy retention, and the current low-interest rate environment, there have been various short-lived windows of opportunity in recent years for consumers to obtain favorable terms, pricing, and underwriting.
One of the more significant planning windows of opportunity is about to close in the next few months. Initiated by Genworth, the industry leader, premiums on new long-term care insurance policies for single women are slated to increase by 20% to 40% beginning in April. Unisex pricing has been the norm until now, with men and women paying the same amount for identical coverage.
The sense of urgency is heightened in California as a result of Genworth’s announcement last Wednesday that the company is suspending sales of individual long-term care coverage effective March 21. It’s unclear when coverage will be available again since its replacement offering is subject to the approval of the California Department of Insurance. If approved, premiums for men and women in California are anticipated to be significantly greater than current amounts.
Why the sudden dramatic change?
While the pending change from unisex to gender-based pricing may seem sudden with the recent increase in publicity, the catalyst has been well-documented in the insurance world for some time. There are basically two factors driving gender-based pricing: (1) Women live longer and, as such, are more likely to require long-term care, and (2) The length of care for women is generally longer than it is for men.
The straw that broke the camel’s back was the Association for Long-Term Care Insurance data showing that 65% of new long-term care insurance policy claims in 2011 were made by women. With claims benefit payments totaling $6.6 billion to over 200,000 individuals, an 8% increase in benefit payments in 2011 compared with 2010, and declining profit margins, the industry took notice.
Change is consistent with standard industry practices
Like all insurance, long-term care pricing is actuarially calculated using historical and projected risk of claims data. Unlike other types of insurance such as life insurance where a known fixed amount is payable upon the occurrence of a specified event, i.e., death, long-term care insurance is a different animal. There’s more uncertainty, including likelihood and origin of a claim, i.e., physical versus cognitive, and amount and duration of benefit payments, although the latter is now less open-ended than just a few years ago with the elimination of lifetime benefits on new policies.
Although gender-based pricing for long-term care insurance is viewed as discriminatory by some and is contrary to the spirit of the Affordable Care Act and the prohibition against gender-based insurance pricing that recently went into effect for new insurance contracts in Europe, it’s justified, financially prudent, and long overdue. The change is grounded in standard risk-based pricing practices integral to the stability of the insurance industry. Here’s a strategy for dealing with increasing long-term care insurance premiums.
If you’re a woman in your 40s to 60s and you don’t currently have long-term care insurance, you need to have a serious discussion with a qualified professional as soon as possible about the importance of long-term care planning as an indispensable part of a successful retirement income plan.
If it’s determined, and you agree, that long-term care insurance makes sense and should be included in your planning solution, run, don’t walk, to an experienced independent long-term care insurance agent who works with leading providers. Your window of opportunity is quickly closing.
DISCLOSURE: Robert Klein is licensed as a Resident Insurance Producer in California (License #0708321).
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.