Exploring the history and aspects of the premium stabilization feature of the Federal Long Term Care Insurance Program
The Federal Long-Term Care Insurance Plan (FLTCIP) is, among all things, the hardest abbreviation to pronounce in the realm of Federal benefits. Other than that, though, it is important to know that there were large miscalculations made in the late ‘90s regarding long-term care insurance in general. Barely anyone elected to purchase long-term care insurance, and those that did went on to retain it much longer than assumed, cumulatively claiming benefits at a much higher rate than what was anticipated. While the private insurance industry migrated to offering LTC “riders,” which were added to life insurance policies and annuities, the FLTCIP did not. In the realm of private LTC insurance, old traditional policies even evolved in response to lackluster demand in the marketplace by developing State Partnership Programs. The Federal plan remained with traditional policies that were usually cheaper than other, similar offerings, but didn’t include any extra features and didn’t participate in the partnership programs.
Over the last ten years, the Federal LTC plan has been administered by John Hancock- who placed the sole bid for the contract when it went up for renewal. Around that same time, existent policies saw an average increase of 83% in their premium amount. A 2018 audit of FLTCIP concluded that a contingent plan was most likely needed due to an uncertain marketplace. So to summarize: a program that only 10% of eligible feds use is operating under a contract that no one wanted, but the company that was already locked in is hiking prices and facing possible financial ruin…
With all that in mind, then, it makes sense that what is being called FLTCIP “3.0” offers a relatively attractive feature: “Premium Stabilization.” Older policies can’t add the feature, but every new plan issued after October 21, 2019, has it included. The details surrounding what portion of your premium that is deposited into a new “PSF” fund and how much is going to FLTCIP itself can make the idea needlessly complicated pretty quickly, so we’ll steer clear of that for now.
The main concept is: if you die before age 85 (and never utilized the coverage), then you’ll get 35% of your premiums paid out as a death benefit to a chosen beneficiary. If you live over 85, however, you can start using up to 50% of premiums paid to pay your future premiums. This is actually a pretty neat solution when considering all the possible faults with the FLTCIP.
This feature is attempting to address one of the main complaints against FLTCIP, and traditional LTC insurance itself- the “Use it or Lose it” aspect. If you don’t need long-term care, all the premiums paid could be seen as a loss. (While this complaint contradicts the main idea behind insurance itself, it is still nonetheless a prominent gripe with long-term care coverage especially.) While insurance companies somewhat solved this by attaching the aforementioned riders to insurance policies and annuities, doing this made those products even more expensive and complicated. What the Premium Stabilization Feature does is a unique way of preserving some value of premiums paid if the insurance itself is never needed.
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Until Next Time,
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**Written by Benjamin Derge, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
