Long-term care, whether provided at home or in a nursing home, is a major financial risk in our senior years. Yet few people buy long-term care insurance. Of those who do, one-third with long-term care insurance at age 65 will let their policies lapse, forfeiting benefits they will likely soon need and the money they have paid in premiums.
It might make sense that those at high risk of needing care should continue their coverage while those at low risk could let their coverage lapse. But the data shows the opposite is true—people who subsequently use care are more likely to lapse, even though they have a good understanding of their relative risk of needing care. A study by the Center for Retirement Research at Boston College set out to find out why this happens. The study reached three main conclusions:
1. Financial Lapsers: Those with lower incomes and less wealth are likely to let their coverage lapse because of the financial burden of the insurance premiums. This may be because the policy was unaffordable to begin with, the household’s financial situation has unexpectedly worsened, or because a gradual, planned decrease in wealth has made Medicaid more attractive than continuing the insurance coverage. On the flip side, those with higher wealth and income have a lower probability of letting their coverage lapse.
2. Strategic Lapsers: There is no evidence that individuals are letting their policies lapse for strategic reasons. These may be individuals who are in good health and believe their risk for requiring care is lower than originally expected.
3. Forgetful Lapsers: Most importantly, the study found that lapses are common among the cognitively impaired. Many of these are unplanned and are due to poor financial decision-making. The individual could forget to pay the premium or no longer understands the potential value of the policy.
Sadly, those who let their policies lapse are also more likely to need long-term care, especially the cognitively impaired. For some, having insurance could even be counterproductive. They buy it to protect against risk but drop it just when the risk becomes more likely. They not only forfeit anticipated policy benefits, but they may have spent their assets more aggressively in retirement based on the false premise that they will retain coverage.
Planning Tip: If you have the funds, you can pay the premium in one lump sum, instead of monthly payments. This would eliminate an unintentional lapse in coverage.
Planning Tip: Have a back-up, perhaps an adult son or daughter, who will be informed if you miss a payment. This will decrease the likelihood that your policy will lapse.
Planning Tip: Make sure the policy is affordable when you purchase it. Coverage may also be reduced if you need to lower the cost of the premium.