Seventy percent of people will need long-term care during their lifetime, and it’s catastrophically expensive! If you like to plan in advance, you may have considered long-term care (LTC) insurance as an option, and if you work for the federal government, you may have considered purchasing coverage through the Federal Long Term Care Insurance Program (FLTCIP). However, for now, this is no longer possible! Why would the federal government suspend its long-term care insurance program for two years?
The federal LTC insurance benefit, which was available through John Hancock Life & Health Insurance Company, currently covers about 267,000 people and is currently the largest group long-term care insurance program in the nation. However, the US Office of Personnel Management (OPM) has suspended applications for coverage under the Federal Long Term Care Insurance Program for new enrollees, effective December 19, 2022. At this time, individuals not currently enrolled may not apply for coverage, and current enrollees may not apply to increase their coverage. The suspension will remain in effect for 24 months, unless OPM issues a subsequent notice to end or extend the suspension period.
What if You Already Applied or Have Coverage?
If you applied and were eligible and submitted an application for FLTCIP prior to the start of the suspension period, your application will still be considered. If the application is approved for coverage, then you will receive a benefits booklet and schedule of benefits with complete coverage information. Current enrollees’ coverage status will not change as long as they continue to pay their premiums. For those in a claim status, there is no change to coverage or the claims reimbursement process as long as benefits have not been exhausted.
Why Did This Happen?
Here are some reasons why OPM is discontinuing the program for two years for new enrollees:
- Rate Hikes Were Expected: Last year, John Hancock Life & Health Insurance warned OPM that current premiums are unsustainable and it likely would have to request significant rate hikes … again. Several years ago the premium rates for the FLTCIP increased by approximately 250 percent.
- Low Enrollment: OPM has been selling only about 6,000 new policies annually (which only represents about 0.1% of its workforce). This is probably because of three main reasons:
- (1) the FLTCIP does not include any employer contribution (like federal health insurance does), so federal employees must pay the entire premium, just as if they purchased a private policy;
- (2) the FLTCIP is a group insurance plan, which means that the group (in this case federal government employees) has people who are very healthy along with people who are not so healthy. While that feature makes coverage more accessible for people with health problems, it results in a riskier pool of enrollees for the insurance company and therefore increases the premiums for everyone in the program. This means that if you’re relatively healthy, premiums from a private company outside of FLTCIP might be much more affordable for you;
- (3) FLTCIP is traditional long-term care insurance, where you pay premiums every year until you need a long-term care benefit, and if you never need a long-term care benefit, the premiums you paid are forfeited (in other words, the FLTCIP is a “use it or lose it” program, like all traditional long-term care insurance programs, and these types of insurance programs across the market are approximately 10 times less popular than the newer hybrid policies that we will talk about later in this article).
- FLTCIP Is Not Always the Best Policy. Even if the FLTCIP returns for new enrollments, you should never assume that just because you work for the federal government that FLTCIP is the best long-term care insurance plan for you. You should always shop around for long-term care insurance and never assume that the FLTCIP would be the best or least expensive long-term care insurance policy for you.
- The Entire LTCI Industry Is Shrinking. The entire industry for traditional long-term care insurance has been shrinking for decades, in large part due to the fact that premiums have been skyrocketing over the years due to poor actuarial decisions made years ago that made existing long-term care insurance policies unprofitable for the companies that issued these policies, forcing the insurance companies to go back to each state to request premium rate hikes, which have often been quite substantial, such as the 250 percent increase in the federal long-term care insurance plan several years ago. John Hancock and other LTCI companies have been under increasing pressure from shareholders and market realities to end sales of traditional long-term care insurance, and most companies in this market have in fact stopped offering sales of these traditional long-term care insurance policies.
What Will Happen in the Next Two Years?
OPM is expected to use the next two years to rethink the program and the products it offers, but it is unknown whether they will be able to find insurance companies willing to sell the coverage. The current John Hancock agreement expires in April and it is not clear whether the insurer and the government will agree to extend the contract.
What Are Hybrid Policies and How Popular Are They?
Hybrid policies are a combination of either a life insurance policy or an annuity along with long-term care insurance, and hybrid policies are vastly more popular than the older, traditional long-term care insurance “use it or lose it” policies. Overall, in 2020 only about 50,000 Americans purchased stand-alone long-term care insurance. Although that number increased in 2021 and 2022, according to Howard Gleckman, an expert in the industry, the increased purchases for the last two years are largely because of a burst of sales to residents of Washington State, where residents were forced to purchase private long-term care insurance in order to avoid a payroll tax hike that state imposed to fund a public long-term care insurance program. Excluding the Washington State increase, Gleckman says that sales of stand-alone policies likely fell again in 2021 and 2022.
By contrast, in 2021, approximately 500,000 people purchased combination or hybrid policies, though according to Gleckman that number also was inflated by Washington State sales.
Why Are Hybrid Policies Usually Better?
With hybrid policies, if you don’t ever need long-term care, then you don’t lose the coverage; instead, you can take withdrawals from the annuity to help you continue to pay your monthly expenses or, if that’s not needed, you will have a life insurance death benefit to go to your desired beneficiaries. Although the premium you pay for a hybrid policy will always be more expensive than the premium for a traditional long-term care insurance policy with a similar benefit, there are many advantages of hybrid long-term care insurance policies:
- Because hybrid policies are based on a life insurance chassis, if you would like to pay annual or monthly premiums, your premiums will never increase, as opposed to traditional long-term care insurance which is built upon a health insurance chassis and, as we have already seen, can drastically increase over the years.
- Hybrid long-term care insurance is generally easier to obtain, even if you have a preexisting health condition.
- The insurance company specifies a specific lump-sum that is available for LTC-related expenses — home health care, assisted living expenses, or full-time nursing home care.
- After a specified surrender period, such as five years, you can typically elect to receive a full refund of a premium if for some reason you decide you no longer need the insurance coverage.
- Almost all hybrid long-term care insurance policies offer the ability for buyers to pay a onetime lump sum premium, sometimes using funds inside of an IRA or other tax-qualified plan. The lump-sum option is a great idea if you have significant savings set aside that are not required for day-to-day living expenses. Paying your premium via a onetime lump sum gets you a much bigger “bang for the buck” as far as policy benefits, because the insurance company has use of your money for a longer period of time. Similarly, paying a onetime lump sum using money in an IRA can give you an even bigger bang for the buck because the insurance company has use of even more money for a longer period of time, because they get the benefit of using taxable funds that actually don’t belong to you because a portion of these funds still has to go to the IRS. If you are interested in this strategy, you may want to read my book entitled Tax-Free Money for Long-Term Care, available for free if you stop by our Fairfax office.
Of course, hybrid asset-based long-term-care insurance is not right for everyone, and there are many other asset protection strategies to protect your assets from the potentially devastating costs of long-term care.
Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care insurance advisor. I have been helping clients since 2006 purchase and use hybrid LTC insurance policies to assist in paying for long-term care, especially home care and assisted living, before the need for the nursing home level of care arises. Learn more here.
Planning Ahead for Long-Term Care
It is always wise to plan ahead for when the need for long-term care eventually arises. Life Care Planning and Medicaid Asset Protection is the process of protecting assets from having to be “spent down” in connection with entry into nursing home care, while also helping ensure that you and your loved ones get the best possible care and maintain the highest possible quality of life.
To learn more about how we can help you afford the devastatingly high cost of long-term care, along with retirement planning, long-term care planning, estate planning, and incapacity planning, please call us now to make an appointment for an initial consultation:
Northern Virginia Long-Term Care Planning: 703-691-1888
Fredericksburg, VA Long-Term Care Planning: 540-479-1435
Rockville, MD Long-Term Care Planning: 301-519-8041
Annapolis, MD Long-Term Care Planning: 410-216-0703
Washington, DC Long-Term Care Planning: 202-587-2797
About Evan H Farr, CELA, CAP
