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Curve Ball

Published by: Jeff Hall, CFP® Date: June 01, 2016

My mother and I were discussing the significant increase in the annual premium of her long-term care insurance policy. Most LTC insurance policy holders have experienced premium increases between 50 – 60% over the last decade so this is not an unusual conversation. I explained to her that this was happening because the actuaries in charge of evaluating the risks and costs for their respective employers were completely off in their assumptions. Policy lapses have been much lower than expected, policy holders are using more of their benefits, and benefits are being paid for longer periods of time. As a result, insurance companies have been adjusting their business models for a few years now. On top of raising premiums on existing policy holders, most insurers have also discontinued issuing new policies altogether.

Make no mistake, actuaries are smart folks and insurance companies pay them a lot of money to evaluate the costs of accepting certain risks while remaining profitable. But, they’re still human and life doesn’t happen in spreadsheets; it’s messy and rarely do assumptions turn out the way you expect.

Life throws curve balls at all of us, and it’s when things seem to be most certain or when we are most comfortable is when the most life-altering events occur. What happens when your spouse who managed all the finances suddenly becomes terminally ill, disabled or passes? What happens when your business partner walks out the door and takes most of your clients with him? Or maybe you have an estate that’s prepared, but heirs who aren’t, and as a result, a meaningful balance sheet to you may turn into a meaningless inheritance to them.

There are plenty of tools at our disposal to help mitigate the impact of uncertainty. We can buy insurance to cover the costs of all kinds of risks, succession plans for business owners can include non-competes and how to address the 5 D’s (death, disability, divorce, disinterest and drug and alcohol abuse), investment policy statements maintain the integrity of the portfolio when there is a risk of us being too fearful, or too greedy for that matter, and legal structures can protect our assets from questionable third parties (by the way, our great state is consistently ranked in the top 5 in terms of states with the most favorable environments for asset protection).

These can be hard issues to deal with and sometimes circumstances don’t ease the decision-making process. Furthermore, no solution is perfect because there are typically trade-offs; insurance has cost and asset protection strategies may not mitigate taxes.

My mother and I determined it would be better to reduce some of her LTC coverage to keep the insurance company on the hook to pay as long as possible should she need care. It was easy to see what we needed to do (keep the policy in force) and it was clear how to do it (reduce her daily benefit amount to keep the premiums affordable). The most important question, though, was why? The answer was fairly straightforward: To protect her and dad’s assets from a life-altering expense. Evidently, most policy-holders know why, too. Something actuarial math couldn’t have predicted.

Jeff Hall is a Partner and Senior Advisor with Rather & Kittrell. He is available at jhall@rkcapital.com