Boston College: Many People Letting LTC Policies Lapse

“Even if the annual lapse rate is just 1 or 2 percent, that builds up to a very high cumulative rate over many years,” said Anthony Webb, a senior research economist at CRR and one of the report’s authors. "Long-term care insurance is a very long-term contract -- you take it out at 65 or younger, but you’re likely to be making claims in your eighties or nineties.”

Analysis by LIMRA and the Society of Actuaries found that long-term lapse risk is 25 percent, “but that figure probably is on the high side,” says Marianne Purushotham, LIMRA's corporate vice president of research, noting that the industry acknowledges it has had trouble tracking lapse data with accuracy.

Genworth and Northwestern Mutual, two insurance underwriters, refused to comment.

The CRR study does not mean long-term care insurance is inherently risky to purchase -- just that a buyer needs to safeguard against an unintended lapse.

Policyholders can ask the underwriter to add the name of a trusted family member or friend who can be sent a reminder if premium payments are due and have not been paid.

Also think carefully about your ability to sustain premium payments. A healthy, single 55-year-old male buyer can expect to pay an annual premium starting at $1,060 this year for $164,000 of potential benefits, according to the  American Association for Long-Term Care Insurance (a female buyer will pay $1,390).

Keep in mind that premiums can rise sharply over time. That has certainly been the case in recent years, with many underwriters pushing through double-digit rate increases.

Policyholders who receive notice of rate hikes will usually be offered options for changing coverage to keep premiums steady. Your options include cutting back the daily benefit amount or increasing the elimination period, the waiting period before coverage kicks in.

Another option is to adjust your inflation protection, since this is a major driver of premiums. The most popular inflation rider is an automatic 5 percent annual increase, but some experts think 3 percent provides adequate inflation protection.

Also check the length of time that benefits would be paid under your policy. Three years of coverage is adequate for most people who use benefits, with a 90- to 180-day elimination period.