Millions of federal employees who have participated in the government's long-term care (LTC) insurance are receiving notices of huge -- and often unaffordable -- premium increases on their policies.
John Hancock is the insurer for the Federal Long Term Care Insurance Program (FLTCIP). Like most long term care insurers, John Hancock vastly underestimated the potential cost of care, policy usage, the impact of increasing longevity and the possibility of today's lower interest rates.
The federal premium increases are as high as 126 percent, with the average increase of 83 percent -- or $111 in the monthly premium. Premiums were not increased for anyone over age 80. Still, federal employees and retirees are confused over the choices and angry at this unexpected hit to their budgets.
Noted long-term care insurance expert Phyllis Shelton has some advice. Her company, LTC Consultants, did the employee education for the FLTCIP when it was first offered in 2002. Now she is helping people plan for LTC at her website, GotLTCi.com.
If you're facing a premium increase, what should you do? It's a process of weighing the increased premiums against the potential benefits.
Shelton recommends looking at the Genworth Cost of Care chart for current assisted living costs, adding about $1,500 per month if you want a deluxe facility, and then projecting that number at 5 percent compound for 20 or 30 years, depending on the age you are today with a simple compound calculator.
Now that you have a ballpark idea of how much money care could cost when you need it, you can better assess a response to the options for dealing with the price increase. Here's an example:
Mary is 54 years old. She is paying $96 per month in premiums for a policy that started with a $200 daily benefit and a five year benefit period with a 4 percent compound inflation protection. She has paid on this policy for 14 years -- a total of $16,128 in paid premiums.
Now the federal program wants to increase her monthly premium to $216.96 per month, a 125 percent rate increase, which Mary cannot afford. They have given her some choices. It's important to choose rationally, not out of anger at the huge monthly premium increase.
She should definitely NOT drop this policy by accepting their offer to stop paying premiums and just settle for care in the amount of the $16,128 she has already paid in. The only winner in this choice is the insurance company!
But if she can't afford the premium increase, she has been given two other options:
Option 1: Reduce the inflation factor to 2.25 percent, which increases her premium to $156.48 -- "only" a 63 percent increase.
Option 2: Reduce the inflation factor to 0.90 percent and keep her premium unchanged.
Option 1 will give her a daily benefit of $673 ($20,471 a month) in 25 years, whereas Option 2 will only give her $438 ($13,322 a month) at that time.
According to Shelton's calculations, Option 1 means Mary's premiums will total about $63,000 in 25 years, for what will now be $1,329,695 in benefits. It's clearly worth it to pay the 63 percent rate increase, especially when you consider that she will need about $22,000 a month in 25 years to pay for a deluxe assisted living facility or significant home care.
Assuming Mary needed to start using care in 25 years, and she needed that care for five years, she would have paid in a total of $45,000 in premiums but would receive total benefits of $1,784,163 to pay for her care!
Another option to lower your premium is to shorten the benefit period. Choices are two, three or five years -- probably enough coverage unless Alzheimer's or stroke runs in your family.
Most important, don't get angry and don't act in haste if you're in the FLTCIP and receive a premium increase. Shelton emphasizes that you aren't limited to the choices in the rate increase letter. And that's The Savage Truth.