One alarming reason people let their long-term care insurance lapse

A study finds that lapse rates are especially high among people who are cognitively impaired.

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Many people will end up needing assistance with daily activities like bathing, eating, and dressing as they age. These long-term care services can be costly — a private room in a nursing home costs close to $8,000 a month on average. [1] To cover these costs, some people buy long-term care insurance. But a new study published in the Journal of Risk and Insurance finds that many people let their policies “lapse” — meaning they stop paying their premiums and the policy is canceled.

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Among long-term care policies issued from 1992 to 1996, 25.9% lapsed after 5 years, and 41.1% lapsed after 15 years. Current lapse rates are lower, but are still substantial: Men and women who purchase a policy at age 65 have a 27% and 29% of lapsing their policies before death, respectively. The study finds that lapse rates are especially high among people who are cognitively impaired — meaning that people who are especially likely to need long term care are also especially likely to lose it.

What is long-term care insurance?

Long-term care insurance pays for services that help people meet their health and personal needs, such as dressing, bathing, eating, or using the bathroom, when they can’t care for themselves independently. These services can be provided in a nursing home, adult day care center, or at home.

Why do people let their long-term care insurance policies lapse?

The study identified three major reasons people might stop paying their premiums. The first is strategic: People let their policies lapse because they think they won’t end up needing long-term care. The second is a change in financial status, which makes it harder to pay premiums. The third is unintended lapsing.

The study analyzed lapses from 2002 to 2006 using data from the University of Michigan Health and Retirement Study, a long-running survey of more than 20,000 Americans over the age of 50, allowing researchers to track participants over time. It found that lapse rates are “significantly and substantially higher among people with lower cognitive scores.” The study estimates that if everyone with low cognitive scores during the study period had median cognitive scores, lapsing would be 17% less common. 

“These are the people who are quite likely to need their policies in the near term,” says Leora Friedberg, an associate professor of economics at the University of Virginia and a co-author of the study.

The cost of losing your long-term care insurance

The consequences of lapsing on a long-term care insurance policy are significant. First, you’re not covered anymore, no matter how much you paid in premiums before you lapsed. Second, you’ll have to pay much more if you want to buy coverage again. You’ll have to go through underwriting all over again, and because you’ll be older and likely less healthy, you’ll almost certainly pay higher premiums.

“It’s going to be way more expensive, especially if you’re that person who’s experiencing cognitive decline,” Friedberg says.

How to prevent lapsing on your long-term care insurance policy

Long-term care insurance is a difficult product to buy. It’s costly and it often only pays off years after you first buy it. As the study shows, it can be a challenge for older people to keep up with the premiums. If you opt to buy it, Friedberg says to loop someone in to help you manage the payments.

“You want to have a structure in place to keep track of the payments and make sure someone else is going to be on top of it if you start to lose track,” she says.

The insurance industry has also struggled with the cost of long-term care insurance. One report says the industry is in “crisis” after companies charged premium rates that were too low in the 1980s. One way to provide more certainty could be to allow policyholders to pay more of their premiums upfront. Friedberg acknowledges that this is a limited solution — only some wealthy households could afford it.

Some people may opt to add a long-term care rider to their life insurance policy so they can get two forms of coverage for one payment, but these hybrid policies are often more expensive than buying long-term care insurance on its own.

Friedberg and her fellow researchers are studying a product offered in the United Kingdom called an immediate needs annuity. As with regular annuities, you pay a lump sum and receive a regular income in exchange, only the money is used for long-term care. In the United States, some states are stepping in to address the cost of long-term care. But as of now, there’s more research to be done in solving the long-term care crisis and making sure Americans can afford the care they need as they age. 

“We don’t have a good set of policy options in this market,” Friedberg says.

Image: Ron Levine / Getty