It’s no secret that the cost of insurance is rising. More claims are being filed as people live longer, so premiums are rising to help offset the cost. As a result, many policyholders may consider cancelling their policy.
They’re questioning if their policy is worth the cost, especially if they’re not currently using it. And, what happens if you cancel long-term care (LTC) insurance? Are there any consequences?
The same factors that impacted your decision to secure LTC insurance are the same ones that should determine whether you should cancel it. Long-term care insurance cancellation can have long-lasting financial and care-related implications. If you are in need of long-term care in the future, you may not be able to afford it without a long-term care insurance policy, and you may be unable to secure a new policy in the future.
Before you cancel your policy, be sure to explore your options. The guide below will walk you through what to expect if you cancel your coverage, including if you’re eligible for refunds, potential alternatives to cancelling, and your options if you live in Washington state.
While cancelling your LTC policy may save you money in the short term, it may end up costing more in the long run.
Why Someone Might Consider Canceling LTC Insurance
There are so many different reasons that a person may consider cancelling their long-term care insurance.
- Rising costs. The monthly premiums may become difficult to afford on a fixed income, especially if you are older. Your premiums will increase over time as the likelihood you may need to receive care increases.
- Changing health needs. Your policy may no longer seem necessary if your health care needs have changed. Additionally, shifts in your care preferences may lead you to believe you no longer need a policy.
- Financial situation. You may feel that you can self-fund your care from your savings or your estate. However, this can quickly drain your accounts, leaving you with no legacy to give to your loved ones.
- Dependence on others. Some policyholders may feel that they can rely on family members or government support rather than paying for their own care. While these may be viable options, there are often gaps in care that an LTC policy could help address.
LTC policy premiums can be expensive, and many people are faced with the tough decision of what to cut out to make ends meet. However, they often fail to consider the long-term implications of what happens when you cancel your policy, including how you’ll pay if you do end up needing care.
What Happens When You Cancel a Policy
Most traditional long-term care policies are use it or lose it. That means that if you don’t use the benefits as outlined in the policy, you forfeit all premiums paid. You are most likely not eligible for refunds or credits, which can be disappointing if you have already invested a significant amount into your policy.
Additionally, depending on the insurance carrier, you may lose all future eligibility for long-term care benefits. It’s often difficult or even impossible to repurchase coverage later, especially as you get older and your health changes.
The best time to secure coverage is when you don’t yet need it, often in your 40s and 50s. If you get a policy when you’re younger, then cancel it; it will be harder to obtain another policy. If you do, the premiums will often be much higher, costing you more than keeping your initial policy would have.
While cancelling an unused long-term care policy may seem fiscally responsible in the immediate future, it can lead to devastating financial consequences in the long term.
Refunds and Cash Surrender Value
Typically, standard LTC policies do not offer refunds. Any money that you paid into policy premiums will not be returned to you if you cancel the policy. If you do end up needing long-term care, you will need to pay for it all out of pocket and cannot claim any portion of a previously paid-for long-term care policy.
There are some exceptions to the rule. For example, some hybrid of life insurance-based LTC policies may include a cash surrender value. If your policy has that clause, you may be able to receive a lump-sum payment when you cancel your policy. This will often be a portion of the amount that you paid in, and less than the value you would be eligible to receive if you require long-term care.
Before cancelling your policy, be sure to review your policy documents closely. If you have questions, speak with your insurance agent to help you better understand your contract’s terms. LTC policies can be complex, so you don’t want to miss any of the terms and conditions.
Washington State Consumer Protections
Washington state has consumer protections in place for long-term care policyholders, even if their policy lapses. There’s a mandatory 30-day grace period for missed premium payments before insurance companies can cancel policies. And, insurers must provide written notice before termination due to non-payment.
Keep in mind that some LTC insurance policies in Washington may allow reinstatement if you can prove cognitive or functional impairment caused missed payments. If this is the case, be sure to appoint someone you trust to ensure your policy is paid each month or enroll in automatic bill payment.
The intention of long-term care policies is to help you control your care later in life, and losing your coverage can actually do the opposite.
Alternatives to Canceling Your Policy
Before you cancel your policy, it’s important to consider alternatives to help reduce costs. Speak with your insurance agent to see if it’s possible to:
- Lower your premiums. You may be able to reduce your benefits or adjust inflation protection to help make your policy more affordable.
- Request a suspension. Select policies allow you to suspend benefits for a set time rather than cancelling them completely. This may preserve your right to reinstate your policy at a later date.
- Obtain a paid-up option. You will no longer pay your monthly premiums but can still obtain reduced benefits based on the amount of money you have paid in. You won’t get the full value of your benefits, but it’s better than a full cancellation where you reap no benefits.
Your insurance agent can walk you through your options to help you choose an alternative to cancelling your policy.
When to Consult a Financial or Insurance Professional
It never hurts to get a professional opinion, especially when it comes to your financial future. Before cancelling your policy, speak with a licensed agent to fully understand the trade-offs. Although you may not be paying the monthly premium, you will be responsible for all long-term care costs out of pocket, which will be significantly more expensive.
Financial advisors can help assess your ability to self-fund care, including reviewing your savings, retirement fund, home, and the overall value of your estate. Keep in mind that some government insurance, like Medicaid, requires you to spend down your estate before it will kick in, which means that you will leave nothing behind for your loved ones.
If affordability is a concern, a financial or insurance professional can help you explore all modification options before you walk away from your policy.
Conclusion
There’s a reason that you sought a long-term care policy. You understood the cost of future care and didn’t want to take on that financial burden out of pocket. Now, you may be reconsidering your choice for any number of reasons. However, it’s important to remember that canceling long-term care insurance can save money today, but it may limit your options tomorrow.
In Washington, you have some legal protections, including a 30-day grace period for missed payments before your policy is cancelled. That could give you wiggle room to bring your policy current and allow you to explore alternatives to cancellation with your insurance agent.
Regardless, cancelling your long-term care policy is still a decision that requires careful thought. Don’t make it prematurely, hoping to save a few dollars each month. You want to make the choice that best fits your goals.
If you have questions, our team of experienced professionals at Lavine LTC Benefits is here to help. We can walk you through alternatives, answer questions, and provide recommendations based on your personal financial situation and your future care goals. Reach out today to get started. The perfect long-term care insurance policy is just a call away.