For Most Employees and Retirees Enrolled in the Federal Long Term Care Insurance Program, it is Decision Time
General Information About the Enrollee Decision Period
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Amount of An Enrollee’s Increase in Premiums
Paid Up Limited Benefit, No Future Premiums Due Option -Also Known as the Contingent Benefit Upon Lapse
The paid-up, limited benefit, no future due option is referred to as the “contingent benefit upon lapse” as discussed in the FLTCIP Benefit Booklet. It is a consumer protection feature that is built into an enrollee’s FLTCIP coverage and available under certain conditions when a premium increase occurs. The option allows an enrollee to stop paying premiums and provides paid-up coverage with a reduced level of benefits.
If an enrollee chooses this option, the enrollee stops paying premiums. However, his or her maximum lifetime benefit will be reduced to an amount equal to his or her cumulative premiums paid through January 1, 2024, or 30 times the Daily Benefit Amount under his or her coverage, whichever is greater. The following example illustrates.
Example 3. Same information as Example 2. Rosalyn chooses the paid-up limited benefit. When her decision took effect on January 1, 2024, Rosalyn’s daily benefit was $300 and with a 5-year benefit period. She paid a total of $108,500 in premium since she enrolled in the FLTCIP in 2001. Her current total FLTCIP benefits are: $300/day times 5 years (1,825 days) which equals $547,500. Rosalyn stops paying the premiums. But if Rosalyn has to file a claim in the future for her LTC needs, she only has $108,500 in benefits (the amount of cumulative premiums she has paid in 23 years). Currently, the average cost of a semi-private room in a nursing home in the U.S. is $102,000 per year. If Rosalyn had to go to a nursing home, then she would have enough in FLTCIP benefits to pay for a one-year stay. That is the case whether Rosalyn has to go to a nursing home in one year, five years, 10 years or longer. With LTC costs increasing on the average 4 to 8 percent per year, Rosalyn’s paid-up limited benefit no future premium due option is worth less every year.
Some Observations About the FLTCIP and Recommendations for Current FLTCIP Enrollees
There have been three “Enrollee Decision Periods” (2009, 2016 and 2023) in which current FLTCIP enrollees had to make decisions affecting their LTC benefits in order to not be subject to immediate increases in their premiums, had they not changed their benefit options. In 2016 the average increase in premiums for enrollees who chose not to decrease their LTC benefits was 83 percent; during 2023, the average increase in premiums for current enrollees who choose not to decrease their benefits is 86 percent.
From its beginning in 2001, the Federal Long Term Care Insurance Program made it clear to potential enrollees that FLTCIP premium rates will not be level and never increase. With LTC insurance policies, premium rates are guaranteed renewable. There is no type of LTC insurance policy in which premiums are level for the entire time the insurance is in force. This includes both individual LTC insurance policies and group sponsored LTC insurance policies.
However, the severe increases in FLTCIP enrollee premiums have resulted in many enrollees not being able to afford the premiums. These enrollees are forced to take the “paid-up: limited benefit, no future premium due option, as illustrated in Example 3 above. That type of arrangement favors John Hancock Life and Health Insurance Company, the government’s LTC Partner. While the enrollee who chooses that option no longer pays the premiums, the enrollee will then be subject to at least a 50 to 75 percent reduction in benefits. If the enrollee dies before needing the benefits of his or her FLTCIP insurance, the LTC Partner keeps all the premiums paid. John Hancock keeps the premiums while the enrollee is alive, investing the premiums (usually in US Government bonds) and does not pass onto the enrollee any associated earnings as part of the paid-up benefits.
In the meantime, the FLTCIP is in temporary suspension, between December 19,2022 and December 19,2024 for new applicants. During this two-year suspension period, no federal and postal service employee and annuitant, postal service annuitants, members of the Uniformed Services, and eligible family members - spouses, children over the age of 18 and parents and parents-in-law of employees – can apply to the FLTCIP. Those employees and annuitants and family members who ere enrolled in the program as of December 19,2022 continue to pay their premiums and, if they have a need to use their benefits, such as going into a nursing home or assisted living, or needing home health care, the FLTCIP will pay the benefits. Under the “waiver of premium” benefit associated with any qualified LTC insurance policy; the enrollee stops paying the premiums while the benefits are paid. Those enrollees who do not incur a need for benefits are subject to the steep increase in premiums every seven years and have to decide what to do during the Enrollee Decision Period.
The FLTCIP has a big problem and is not alone when it comes to long term care insurance. Like all of the few remaining insurance companies who currently offer either individual or group sponsored LTC insurance policies, John Hancock Life and Health Company is finding out that LTC insurance is not an attractive insurance for most individuals. Only 3.7 percent of Americans currently own LTC insurance policies. There are now eight insurance companies offering LTC insurance to individuals (down from over 100 insurance companies offering LTC insurance in the 1990’s and early 2000’s).
Unless John Hancock Life and Health Insurance Company produces a way to make the FLTCIP more attractive, it is doubtful that the program can continue on its present course. Fewer and fewer current enrollees are going to be able to afford to pay the steep increase in premiums that will continue in the future. As discussed above, the “paid-up limited benefit, no future premium due option” is not an attractive alternative to unaffordable premiums.
Given this background information about the FLTCIP, the following are some recommendations for current enrollees in the FLTCIP as to what they should and should not elect when they receive their Enrollee Decision Period letters:
- They are advised not to elect the “paid-up, limited benefit, no future premiums due” option. As explained above, this option will result in a significant reduction in benefits (50 to 75 percent) and favors John Hancock Life and Health Insurance Company.
- If the Enrollee Decision Period letter shows a premium increase of more than 25 percent, an enrollee is advised not to accept that increase and instead to accept a reduction in benefits – benefit period and/or inflation protection. In order to not lose any of the LTC benefits, the enrollee is advised to consider the difference between what they are paying now in premiums versus what they would pay had they accepted the premium increase in the Enrollee Decision Period letter. Investing in a way that is as tax-efficient or better, tax-free, such as in a Roth IRA or the Roth TSP. The following example illustrates:
Example 4. Same facts as in Example 1. Gilbert selects to have his inflation protection reduced from 3.0 to 0.6 percent. His annual premium will remain at $4,800 per year and not increase to $6,720 per year, a savings of $1,920 per year. His current daily benefit is $320. Suppose Gilbert incurs a need for LTC in 20 years when he is 80 years old. His daily benefit would have increased (using an inflation factor of 0.6 percent) to $361. With a five-year benefit period (1,825 days), his total benefit amount would then be $361/day times 1,825 days, or $658,825. Had Gilbert elected to keep his current inflation factor of 3.0 percent, his daily benefit would have increased to $578, and his total benefit amount would be $578/day times 1,825 days, or $1,054,850. That is a difference of $1,054,850 less $658,825, or $396,025. If Gilbert intends to retire in ten years at age 70 and decides to contribute $10,000 per year to his Roth TSP, and assuming his annualized investment return is 7 percent (note that past investment performance is no guarantee of future investment returns), the value of his Roth TSP will be $147,836. He can withdraw the $147,836 tax-free to pay for his LTC expenses. If Gilbert elects in his Enrollee Decision Period response to reduce his inflation coverage to 0.6 percent, he will avoid having to pay the additional $1,920 a year and he can make up almost 40 percent of the $396,025 in lost LTC benefits by contributing $10,000 a year to his Roth TSP. He can make taxable withdrawals from his traditional TSP in order to help pay the other 60 percent of lost LTC benefits.
- For those federal employees and postal service employees, and uniformed members who are new employees or mid-career, and contemplating whether or not to apply to the FLTCIP when enrollment reopens in late December 2024, perhaps “self-insuring” may be a better strategy. This means contributing more dollars to the Roth TSP and/or to Roth IRAs, or if eligible contributing more to a Health Savings Account in which tax-free withdrawals can be made to pay qualified LTC expenses.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.