New findings on long-term care policy lapse rates raise questions

Long-term care insurance really is long term: buying a policy commits you to pay premiums over decades. If you stop those payments, thousands of dollars you have already spent might as well have gone down the drain.

A new study suggests that is exactly what a sizeable number of policyholders are doing – allowing their policies to lapse.

More than one-third of long-term care insurance (LTCI) policyholders who buy policies at age 65 or older let their coverage lapse sometime in their lifetime, according to a study by the Center for Retirement Research at Boston College (CRR).

The study concludes that individuals most likely to let a policy lapse are those who need the coverage most – those with cognitive impairment, and might soon need care, or those with low income and wealth, who would be in financial jeopardy in a medical crisis.

Defenders of the industry have been pushing back against the CRR report. Industry data suggests that no more than 1 percent or 2 percent of policies are allowed to lapse in any given year. But CRR widened out the lense to the long view.

“Even if the annual lapse rate is just 1 or 2 percent, that builds up to a very high cumulative rate over many years,” said Anthony Webb, a senior research economist at CRR and one of the report’s authors. “Long-term care insurance is a very long-term contract – you take it out at 65 or younger, but you’re likely to be making claims in your eighties or nineties.”

Analysis by LIMRA and the Society of Actuaries found that long-term lapse risk is 25 percent, “but that figure probably is on the high side,” says Marianne Purushotham, LIMRA’s corporate vice president of research.

The new data on lapse rates really isn’t a reason not to buy LTCI – it just points to the need for careful planning. That can include making sure to protect against lapse due to cognitive decline by having a trusted family member or friend named to backstop you on payments. Also, give careful consideration to your ability to sustain premium payments – and possible rate hikes – over the long haul. I delve into the details in my Reuters Money column this week.

Comments

  1. I urge anyone who wants to know why the Boston Report is misleading to the public, to email me for a brief factual explanation. It is too bad that the insurers chose not to reply. Makes them both look guilty (which they are not) …
    Jesse Slome
    American Association for Long Term Care Insurance

  2. Unfortunately, the study done by the Center for Retirement Research (CRR) uses old data. Their study only looked at people who may have owned LTC insurance 13 years ago (way back in 2002). And their sample size was very small–about 124 people who may have lapsed their LTC insurance sometime between 2003 and 2006.

    The biggest flaw in the study is that they ignore the current federal law that protects seniors from losing their long-term care coverage. The policies they studied were not protected by this law. Due partly to this federal law, the percentage of seniors that lapse their LTC insurance each year has dropped by 68% since the year 2000.

    Scott A. Olson

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