Last week, the federal government announced that premiums for nearly all of its existing long-term care insurance policies will increase—by an average of 83 percent. In other words, they will almost double for federal employees and retirees.
What does such a price hike on current policies mean for consumers, and for the future of long-term care insurance?
First, a bit of background. The federal program, which insures about 274,000 current and retired workers, is operated under contract with a private insurer, John Hancock Life and Health Insurance Co. With the current seven-year agreement about to expire, the government put it out for bid. However, only Hancock wanted the job–which requires it to sell new policies and pay claims on existing policies, including those sold before it first got the contract in 2009.
Hancock and the federal Office of Personnel Management (OPM) concluded that current premiums will not be sufficient to pay claims on those old policies. That’s hardly a surprise. It’s been the pattern with nearly all older policies in the commercial market.
As regular readers of Caring for Our Parents know, the long-term care industry has a huge problem: Long-term care insurance companies count on two sources of income to pay claims and make a profit–premiums and their investments of those premium dollars. But they normally invest only in super-safe bonds, which are paying very low interest rates and are likely to do so for the foreseeable future.
The result is that 90 percent of long-term care insurers have abandoned the business. Those that have stuck it out have also raised premiums on older policies. Genworth, for example, the largest seller of long-term care policies, has gotten approval from most state regulators for a series of rate increases in recent years.
Hancock last raised premiums on existing federal policies when it received that last seven-year government contract in 2009. But that premium increase, which averaged about 25 percent, assumed interest rates would rise once the economy improved (remember, 2009 was in the depths of the Great Recession). But Treasury bond rates are almost one-third lower than in 2009.
As a result, the rate hike figured to be steep (Hancock raised premiums for new policies last year). But this one has produced major sticker-shock.
After the announcement, many retired federal employees were outraged by the premium increase and uncertain about what to do. The wife of one long-time fed told me that premiums for her and her husband will increase from about $400 per month to more than $800, or roughly $10,000 annually.
Whether you bought as a federal employee or in the commercial market, what options do you have if you get hit by a rate increase such as this?
Swallow hard and pay the premium. If you can afford it and don’t want to risk self-insuring, it may be your best choice.
Reduce your benefits. The federal policy and some commercial policies will allow you continue to pay your current premium if you accept a lower benefit. One cost-saving idea: If you purchased generous inflation protection (say, 5 percent annually, compounded), you might consider inflation protection that is more in line with recent cost increases, say 3 percent. You might also reduce the term of your benefit, from say, a 10-year policy to 5 years. But remember, if you do this you will pay more out-of-pocket if need care for a long time.
Shop around for another policy. Few carriers are selling these days, new policies are unlikely to be cheaper than old ones, and if you are over 65 you may fail underwriting. Still, if you are about to get socked with a big rate hike, it can’t hurt to shop around and see how much insurance would cost from another carrier.
Allow the policy to lapse and go bare. Can you afford to self-insure? Have you thought through what it would mean to go on to Medicaid? However, if those premium increases mean you can no longer pay for necessities such as medical care or utilities, you may have no choice.
Even if you lapse, the federal policy and some private insurance may pay still benefits equal to what you paid in premiums (minus what the insurers keep for taking the risk of your claiming benefits). But that’s going to be relatively small amount. Say you paid $20,000 in premiums over 10 years. Even if you got the entire amount back, it would only pay for about two months in a nursing home.
Predictably, members of Congress say they are outraged and vow to investigate the rate increase. But they’ll learn that premiums for private long-term care insurance will continue to increase, and become increasingly unaffordable for many consumers. The private market alone cannot develop a workable solution. That will almost certainly require a public program to cover at least some of the risk against the catastrophic costs of long-term care.