New research suggests people are doing a better job of keeping those policies alive, there’s still a key role for an advisor looking to protect any client’s years of investment
The Center for Retirement Research at Boston College released a report this week that found one in three individuals with LTC insurance at age 65 will let their policies lapse before death forfeiting all benefits.
“At current lapse rates, men and women age 65 have, respectively, a 32- and 38-percent chance of lapsing prior to death, assuming that lapse rates remain at the same levels observed for recent cohorts,” the report’s authors, Wenliang Hou, Wei Sun, and Anthony Webb wrote. “It shows that policies issued in the 1980s had substantially lower retention rates than those issued more recently, but retention rates remain relatively low, which means lapse rates are relatively high.”
The authors suggest three reasons why lapsing occurs which is contrary to the standard industry belief that most people hang on to their LTC policies.
The first reason for lapsing is that some policyholders grow tired of paying premiums despite the fact they don’t possess any new information about their risk of requiring care. The authors call these clients “Financial Lapsers.”
The second group are what the authors term “Strategic Lapsers,” those people who’ve determined that their health isn’t getting worse and won’t be at risk of needing care in the future. They opt out for strategic reasons rationalizing that the premiums are in fact a waste of time and money.
The final group are “Forgetful Lapsers,” those who because of cognitive impairment forget to pay their premiums at exactly the worse time; when they need the care they’ve been paying for.
Who doesn’t lapse?
“The results show that higher financial wealth and higher income are associated with a lower probability of lapsing,” the report states.
The most frustrating part of the study: approximately 23% of the cases studied lapsed their LTC policies within four years of needing care.
The takeaway from this report is that advisors who have clients 65 or older and own LTC insurance are wise to keep a close eye on their client’s premium payments; evidence suggests many will let their policies lapse for the wrong reasons or at the wrong times.
Sad but true.
“At current lapse rates, men and women age 65 have, respectively, a 32- and 38-percent chance of lapsing prior to death, assuming that lapse rates remain at the same levels observed for recent cohorts,” the report’s authors, Wenliang Hou, Wei Sun, and Anthony Webb wrote. “It shows that policies issued in the 1980s had substantially lower retention rates than those issued more recently, but retention rates remain relatively low, which means lapse rates are relatively high.”
The authors suggest three reasons why lapsing occurs which is contrary to the standard industry belief that most people hang on to their LTC policies.
The first reason for lapsing is that some policyholders grow tired of paying premiums despite the fact they don’t possess any new information about their risk of requiring care. The authors call these clients “Financial Lapsers.”
The second group are what the authors term “Strategic Lapsers,” those people who’ve determined that their health isn’t getting worse and won’t be at risk of needing care in the future. They opt out for strategic reasons rationalizing that the premiums are in fact a waste of time and money.
The final group are “Forgetful Lapsers,” those who because of cognitive impairment forget to pay their premiums at exactly the worse time; when they need the care they’ve been paying for.
Who doesn’t lapse?
“The results show that higher financial wealth and higher income are associated with a lower probability of lapsing,” the report states.
The most frustrating part of the study: approximately 23% of the cases studied lapsed their LTC policies within four years of needing care.
The takeaway from this report is that advisors who have clients 65 or older and own LTC insurance are wise to keep a close eye on their client’s premium payments; evidence suggests many will let their policies lapse for the wrong reasons or at the wrong times.
Sad but true.
