Imagine investing in a long-term care policy for years and then letting the coverage lapse right before you actually need the protection.
Tragically, this happens far more often than you might imagine.
A new study from the Center for Retirement Research at Boston College suggests that more than a third of individuals who own long-term care insurance at age 65 will at some point stop paying their premiums, which forfeits all the benefits.
You might assume that the policyholders most in need of this future coverage would retain their policies and those at low risk would let the policies lapse, but data doesn’t show this to be the case.
The study looked at three possible alternatives for lapsed policies:
1. The policyholder lapses strategically. They assume that they will remain healthy and decide to take the risk of dropping coverage.
2. Policyholders can’t afford to continue the coverage. They stop writing checks because they can’t handle the expense.
3. Policyholders don’t have the cognitive ability to keep the payments current. These individuals aren’t as sharp and are more likely to not stay on top of their bills. They may also no longer understand the value of their policies.
The study showed no evidence that individuals were strategically deciding to stop paying their premiums. The individuals most likely to stop their payments either couldn’t afford to continue them or were cognitively impaired.
For lapsers, the study suggested, having long-term care insurance could be counterproductive. “They not only forfeit anticipated policy benefits, but may also adopt an aggressive path for drawing down their wealth in retirement based on the false premise that they will retain coverage.”
The researchers said one way to eliminate individuals losing their long-term care coverage would be to pay in a lump sum.
Most likely candidates for long-term care would have accumulated significant financial wealth by the time they retire. The study, however, points out that this could be problematic for insurers since paying with a lump sum would make it difficult to increase premiums should claims be higher than anticipated.
To prevent unintended policy lapses, policyholders may want to share their policy information with their children or other relatives who can check to see that the premiums continue to be paid.