Retirement & Financial Planning Report

Large increase in premiums and/or decrease to benefits for the next contract period likely. Image: Pla2na/Shutterstock.com

Projected future income from premiums in the Federal Long-Term Care Insurance Program is not enough to cover projected future claims, an audit by the inspector general’s office at the OPM has found.

It said that while the program over 2017-2019 took in about $2.2 million more than it paid out, boosting a trust fund held by the contractor (the John Hancock insurance company), under current projections those reserves will be depleted by 2048. That’s due to lower long-term interest rates than previously assumed and “higher claims utilization due to longer life expectancies (especially with dementia patients).”

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It says that participants “will likely see a large increase in premiums and/or decrease to benefits for the next contract period to help reduce the deficit. As demonstrated at the start of this contract period in 2016, FLTCIP’s large one-time premium increase and/or benefit decrease caused an unexpected hardship to its participants.” That contract is to expire in 2023.

The report recommended that OPM and the carrier “immediately update participants on FLTCIP’s funding status and take corrective actions to mitigate the adverse effects that another large one-time premium increase and/or benefit decrease could have on the program and its participants.”

In response, the carrier pointed out that in a letter to participants with the option to purchase additional inflation protection it said “there is a strong likelihood that premium rates for many enrollees may need to increase” while OPM noted that earlier this year it told the carrier to stop active marketing efforts to prospective applicants.

The IG said it considered those replies responsive to that recommendation but reiterated a separate recommendation—opposed by both–to “develop an annual communications plan to provide summary level FLTCIP funding status to participants, so they are properly informed of the program’s funding level.”

FLTCIP premiums are based on age when the person buys the coverage and on choices including the daily benefit amount, the maximum length of the benefit period and inflation protection. Premiums may increase during the course of a contract due to enrollment and claims patterns, however.

That happened effective in March 2010 for enrollees who were under age 70 when they purchased automatic inflation coverage. Also, rates were increased for all enrollments after July 31, 2015 for the same reason; that did not affect those already enrolled at the time. Further, rates increased in November 2016—again for the same reason—for almost all of those who had enrolled before August 1, 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. In that case an enrollee can stop paying premiums and remain eligible for a much-reduced benefit.

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