Publisher's Perspective

The record has been one of increasing premiums and decreasing benefits. Image: Ground Picture/Shutterstock.com

If you’re old enough to have seen the posters that said “What if they gave a war and no one came?”—much less if you are old enough to have used that phrase yourself—you are old enough think about the potential role of long-term care insurance in your financial planning.

However, if you are like most people, you haven’t given it much thought—and if you have, you likely decided against purchasing it. And that’s what brought the Federal Long-Term Care Insurance Program to where it is today: they gave a federal employee insurance program and (almost) nobody came.

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The program was created two decades ago to fill in one of the gaps in the insurance offerings for federal employees, which at the time were limited to the FEHB health insurance and FEGLI life insurance programs (FEDVIP vision-dental insurance came still later). Unlike those two programs, there would be no government contribution toward premiums but there were hopes that the insurance would be very affordable and therefore very popular.

For example, FLTCIP was structured to create the largest possible pool of potentially insured persons, by extending it to current and former federal employees and uniformed military personnel and their family members over age 18—even including parents—and allowing enrollments at any time. That included, in contrast to the FEHB and FEGLI programs, ability to newly enroll after retirement.

Also, there was an assumption that the program would enjoy robust competition among insurance carriers, keeping premium rates down, every seven years when the contract came up for renewal.

Things turned out very differently. So much so that the Office of Personnel Management is suspending new enrollments, and increases in benefit elections for current enrollees, for 24 months starting December 18. “This allows OPM and the FLTCIP carrier to agree on underwriting changes or new premium rates that reasonably and equitably reflect the cost of the benefits provided as required by the FLTCIP statute,” OPM said.

How did we get to this point? An early red flag arose when, on the expiration of the original contract in which two insurance companies were partners, one of them dropped out—and no one else bid. The remaining company, John Hancock, has continued through the subsequent contracts, including the one expiring in 2023.

The record has been one of increasing premiums and decreasing benefits. On the premiums side, there were hikes in March 2010 for enrollees who were under age 70 when they purchased automatic inflation coverage; for all enrollments after July 2015; and in November 2016 for almost all of those who had enrolled through July 2015. The November 2016 increase was so steep that for some enrollees it triggered a provision that applies if a person’s premium increases by a certain percentage over the cost at enrollment.

Meanwhile there have been cutbacks on the benefits side including dropping the option for lifetime coverage and reducing the available inflation protection—although those who were already enrolled at the time of the changes were allowed to keep that coverage.

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Each of those changes—as well as the suspension of new enrollments just announced—was justified on grounds of long-term projections of the program’s income and outgo. On the outgo side, costs have been higher than assumed, largely because people needing long-term care are living longer than they did 20 years ago.

On the income side, the key to funding any type of insurance program, of course, is an adequate supply of people paying in to cover the cost of those who draw out. In some cases, people buy insurance but never will put in a claim; they have effectively paid for the peace of mind that the insurance would be there if the situation arose.

However, given the ever-rising cost of premiums and the ever-decreasing coverage, and the higher chances in this type of insurance that—unlike health insurance, for example—someone never will receive a payout, an overwhelming majority of people simply have chosen not to enroll.

Said OPM in its notice of the suspension, “Approximately 6,000 eligible individuals enroll in FLTCIP annually, which is less than 0.1% of 11 million eligible federal and military actives and annuitants (not including spouses and other qualified relatives who are also eligible).”

It cited a report by the Treasury Department saying take-up of LTC insurance is low in general for reasons including the availability of Medicaid for lower-income persons, “unpaid care or the ability to receive informal care from family; a desire to leave assets to heirs can suppress demand because people may be motivated to postpone consumption and save money; lack of information and awareness about LTC costs and the ways to finance those costs; lack of trust in insurers; and premiums, costs, and loads.”

The two-year suspension will not impose much of a hardship, OPM asserted, because the “low percentage” who might have enrolled in that time will “likely pursue substitute savings and insurance products” instead.

Which raises the question: given all that, why continue the program? After all, an enrollment already is a private contract between the individual and the carrier, and OPM’s involvement hasn’t prevented premium increases and benefit cuts.

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By late 2024, we should have the answer.

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