Critter Corner: The Lapsing of Long-Term Care Insurance Policies and Dementia

Dear Commander Bun Bun,

My grandmother had a long-term care insurance policy, which I know she was paying a lot for. However, she has dementia, and let it lapse. I’m sure this happens all the time, and it’s scary because now is the time when someone like her would need the coverage most. Luckily, we came into Mr. Farr’s office and did Medicaid Asset Protection Planning. Do you have any information on lapsing policies for people with dementia to help others in similar situations?

Thanks for your help,

Paula C. Lapps

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Dear Paula,

Thanks for your inquiry. A recent study produced by the Center for Retirement Research (CRR) at Boston College shows that what you are talking about is, sadly, pretty common. Below are some highlights from the study:

● More than a third of people with long-term care policies at age 65 lapse their coverage before they die, forfeiting all benefits.

● Many people are letting their policies lapse just when they need them, says Anthony Webb, a senior research economist at CRR and one of the co-authors of the study.

● People who suffer a cognitive decline have trouble remembering to pay their bills and one of those bills can be for long-term care insurance. Then, the premium doesn’t get paid. And these are the very same people who are likely to go into long-term care due to cognitive impairment.

● Men and women at age 65 have, respectively, a 32% and 38% chance of lapsing prior to death. (It’s higher for women because women live longer.)

● In a comparison between people who lapsed versus people who went into long-term care, researchers found that people lapsing were more likely than non-lapsers to go into care subsequently.

● Poorer people are more likely to lapse than others, which makes sense since they’re the least able to afford the premiums.

● Trying to buy a new policy after a long-held one lapses is effectively impossible because at that point you will no longer qualify for medical reasons.

● In fact, even among people applying for long-term care insurance for the first time, 27 percent of those age 60 to 69 and 45 percent of those in their 70s are rejected for health reasons.

● Many policies do have a reinstatement provision that allows reinstatement within a defined period of time after a lapse (typically 5 or 6 months), but the policyholder’s family must typically prove that the policy holder had a “significant cognitive impairment” before the lapse, and this is often difficult to prove. We have one client going through this process right now and it is daunting, because if the policy holder did not have formal cognitive testing performed and documented in their medical records before the lapse date, or the cognitive testing that was performed does not indicate the presence of a severe cognitive impairment as required under the insured’s LTC insurance policy, reinstatement may not be allowed.

The Long-Term Care Insurance Industry pushed back hard after the study was released. They told researchers that there’s a safeguard in place to ensure premiums get paid: The policyholder can ask for premium notices to be sent to a trusted friend or relative. Researchers responded that the “safeguard” clearly isn’t working, as policyholders are either not finding a friend or the friend isn’t close enough to be sure the premium gets paid.

Hope this is helpful!

Commander Bun Bun