Reducing long-term care insurance and life insurance costs for fixed-income seniors

Retirees and near-retirees with fixed incomes are often at a loss what to do when faced with unexpected premium increases in life insurance and other forms of insurance. One of the challenges that financial advisors face when meeting with clients for financial planning near their retirement is that many clients can no longer afford their insurance policies. Escalating costs for long-term care insurance, medical expenses, and life insurance are a threat to fixed-income retirees and near-retirees considering the cost of retirement.

According to the American Association for Long-Term Care Insurance (AALTCI), the average cost of a long-term care insurance policy on a 55-year-old individual in standard health is $2,065 per year. (Wall Street Journal, July 2013) Multiple reports state that significant policy premium increases can be expected over the next several years across the U.S. Many long-term care insurance policy owners were surprised to learn earlier this year that their renewal rates will exceed $8,000 per year at a staggering increase as much as 130 percent. (U.S. News Money, March 2016)

Much of the disparity in costs between expiring rates and renewal rates for long-term care insurance is that many policies were priced wrong in the 1980s and 1990s. Insurance carriers did not collect enough money in premium payments to cover the expenses and assumed that policy owners would simply drop coverage over time. Another factor impacting the cost of long-term care insurance coverage is that people are living longer than ever. According to the Center for Disease Control, the number of Americans living past age 100 increased by 44 percent from 2010 to 2014. (CBS News, Jan. 2016) Securing long-term care insurance at age 60 may mean up to forty years or longer in premium payments.

What may be even more concerning for near-retirees is the cost for out-of-pocket medical expenses. The average couple who retires at age 62 can expect to spend $17,000 every year on out-of-pocket healthcare costs until they’re eligible to enroll in Medicare at age 65. (Kiplinger, June 2014) Paying for uncovered costs or deductibles can add up quickly, which places even more pressure on an already tight budget.

Most Medicare Part B policy owners pay $104.90 in premium costs per month with Part B deductible and coinsurance costing $166 per year. (Medicare.gov, Aug. 2016) Medicare Part C and Part D monthly premiums vary by plan. While you may be paying more for health insurance leading up to age 65, it’s wise to consider the cost of Medicare on your monthly budget as a baseline for medical expenses.

The base principle for approaching insurance premium costs is that if you cannot afford a specific level of coverage, you can either adjust your current coverage levels or find new coverage. Reducing the cost of long-term care insurance and life insurance is possible with strategic, well-informed changes to your coverage. As with any insurance decision, it’s essential to consult with a qualified insurance advisor before making any changes to your existing coverage.

Reducing the costs of long-term care insurance

Purchasing long-term care insurance becomes more expensive the later in life it’s secured. Cost increases every year on the applicant’s birthday, rising by two to four percent annually in the applicant’s 50s and as much as six to eight percent in their 60s. (AALTCI, Aug. 2016) For the sake of this discussion, let’s assume that you have long-term care insurance in place.

The solution with arguably the most potential for reducing long-term care insurance costs is to decrease the benefit period length. Many long-term care insurance policies have a two-year (730 days), three-year (1,095 days), and five-year (1,825 days) benefit periods. If you purchased long-term care insurance fifteen or twenty years ago, your policy may have a lifetime benefit period. Changing your lifetime benefit period to a two-year, three-year, or five-year period may make a noticeable change in your premium costs.

It is important not to see the benefit period as a ‘benefit window’ where treatment coverage ends after a two-year calendar window, i.e. July 31st, 2017 through July 31st, 2019. Long-term care coverage is dependent on the amount of daily benefits paid. If your benefit period is three years, your daily benefit amount is $150, and you only require $75 of daily treatment expenses, your benefit period may be extended to as long as six years ($150 x 730 days = $75 x 1,460 days).

The next solution with the most potential may be to reduce your daily benefit amount provided through long-term care insurance. Daily benefit amounts (DBAs) are typically offered ranging between $100 and $450 and segmented into $50 increments. Decreasing your daily benefit amount can help reduce long-term care insurance premiums upon renewal.

Another strategic way to reduce the premium cost of long-term care insurance is to increase the elimination period, sometimes referred to as a ‘waiting’ or ‘qualifying’ period. The elimination period is the amount of time that exists before the insurance benefits begin payout. Long-term care insurance benefits typically start payment at 90 days from beginning of treatment, but it may vary from 0 days to 365 days depending on the policy and insurance carrier. If you have a 30-day elimination period, you are responsible for paying medical expenses until 30 days of treatment are completed before long-term care insurance benefits begin.

Increasing your policy’s elimination period to 90 days will reduce the cost of your long-term care insurance. The value in increasing the elimination period to more than 90 days may leave you vulnerable to significant medical expenses for little difference in premium costs compared to a 90-day elimination period. If you currently have a 30-day, 45-day, or 60-day elimination period, increasing your elimination period to 90 days can save you a substantial amount over the period of ten years. According to the American Association for Long-Term Care Insurance, the lifetime chance of a policy owner buying long-term care insurance coverage at age 60 and using their policy benefits is approximately 35%. (AALTCI, Aug. 2016) Many people who require some sort of intensive care treatment either recover or die within the first 90 days of treatment before a 90-day elimination period is fulfilled.

Long-term care insurance is not activated unless some type of qualifying event is established, such as being incapable of performing without assistance two of the six recognized activities of daily living (ADLs), namely eating, bathing, dressing, toileting, transferring (walking), and continence. The average stay in an assisted living facility is 21 months. (Lifecare Funding, Feb. 2013) This length of time falls well within a three-year benefit window. Choosing to reduce your benefit window can help save on long-term care insurance costs as long as it meets your anticipated length you would require benefits.

Reducing the costs of life insurance

Retirees and near-retirees often have different financial obligations, and yet, many of them have excessive amounts of life insurance coverage. They may have purchased an appropriate amount of life insurance twenty or thirty years earlier when they owned a larger house and were still raising their children. However, many retirees and near-retirees downsize their home for a more manageable property and do not have the financial demands of providing for now-grown children.

Permanent life, variable life, and universal life insurance policy providers in the 1980s through early 2000s may have misjudged the assumed rates of return on the cash value in specific policies. Unfortunately, the rate of return on cash value policies may be failing to meet those projections.

Decreasing the amount of life insurance death benefit is another solution to reducing costs. While you may have required $500,000 in life insurance payout in the event of your untimely death twenty years ago, you no longer require the same benefit amount. It’s unlikely that you have to provide financial support for any of your children and your household should be paid in full. It’s wise to consider the coverage benefits of all forms of life insurance that match your eligibility. Lowering the level of death benefit in your life insurance policy will help reduce the cost of premium payments.

Changing the amount of death benefit does raise a potential risk. If the cumulative premium payments of a life insurance policy exceed specific threshold limits, the life insurance policy may convert into a Modified Endowment Contract (MEC). Depending on the cash value relative to the death benefit of the policy, there may be tax implications to consider if you’re planning on withdrawing money in the future. The U.S. government regulates how much money can be used to fund a specific life insurance policy according to the Internal Revenue Service (Feb. 2007). Talk with a qualified insurance specialist before investing money into a cash value policy.

Some seniors may use the accrued cash value inside a premium life insurance policy to pay the premium of their existing policy. If it is too expensive to purchase a new policy, the cash value can be used to fulfill premium payments for a time. If you choose to use cash from inside the policy to make premium payments, it is expected that the cash value will be exhausted. At that point, the policy will either lapse or you will need to resume premium payments to maintain coverage.

If you are living with a fixed income and considering changes to your insurance coverage, your best and first step should be to contact a qualified insurance agent in the specific area of coverage in question.