financial planner Stephen Zelcer

The Recurring Long Term Care Insurance Price Increase Ultimatum

FLTCIP policy-holders are, once again, being threatened with price increases.
(For those who haven’t been following the news, OPM’s Federal Long Term Care Insurance Program (FLTCIP) was suspended in November 2022 because of these price increases.  No new applications are being accepted, but existing FLTCIP policy-holders still have their policies, and are now being threatened, once again, with price increases.)

Of course, FLTCIP is not forcing policy-holders to pay higher prices.  They are merely giving policy-holders an ultimatum:

  • Pay higher prices to keep your current benefits
  • Keep your current prices, but accept lower benefits
  • Stop paying premiums altogether, and accept a nominal paid-up LTC benefit. 

This is not the first time that policy-holders needed to make this decision.  In FLTCIP’s 20-year history (2003-2023), they have raised rates 5 times.  This most recent rate increase will bump up premiums by 38% – 86%.  (The prior rate increase saw some premiums increase by 126%!)

Understandably, clients are asking, again, what should they do when confronted by these options? 

My Advice:

As with every insurance question, there will always be a trade-off between saving money & being exposed to risk on one hand vs. spending money and mitigating risk on the other hand.  
I, nor any advisor, can tell you how comfortable you should be with taking risk.  

With that in mind, here’s the way I approach the topic. 

Do you even need LTC insurance?

What happens if you don’t have long term care insurance and you experience a LTC event?  Obviously, it’s going to cost you money and deplete some or all of your assets.  That stinks.  But, on a financial level, who does it stink for? 
(I’m not talking on an emotional level – obviously the whole LTC experience is emotionally challenging for the patient who needs the care and the family members who are watching their relative deteriorate. But, for this article, let’s focus on the financial impact.)

Financially, the LTC patient, meaning the person who needs care is not the one at risk.  Even if they deplete all their assets, Medicaid (a state program) will usually cover the remaining costs of Long Term Care. (Most nursing homes are thrilled to have Medicaid as a payor. Some may even assist you to get onto Medicaid.)

No, the person at risk is actually the patient’s survivor(s) who needs those assets.  If the patient depletes their assets on their own Long Term Care needs, there will be less assets for their next-in-line.  LTC insurance is used to protect assets for the survivor.

What if you leave your survivor with nothing?

If you deplete your assets, how detrimental will that be to your survivors? 

  • Well, if you don’t have any survivors, it won’t be detrimental at all (unless you have a stated goal of preserving your assets for someone, or some organization (ex. charity)).
  • If you have surviving children, but they are already independent, then it won’t be detrimental at all.  (I’m not saying your kids have no interest in an inheritance.  I am merely pointing out that if the kids are already financially independent, then it won’t be detrimental to their financial picture at all for you to spend down your assets on your own LTC.  Keep in mind, if you need LTC in your 80’s or 90’s, your children will be in their 50’s or 60’s by then.)
  • If you have a surviving spouse who is also financially independent – for example, they have a pension to support them, and they also have their own assets – then, again, it won’t be detrimental at all. 
  • However, if you have a surviving spouse (or child) who is financially dependent on your assets, it will be detrimental for them if you deplete your assets. This is the situation where you need a LTC strategy. 

Are you self-insured?

If depleting your assets does not create a detrimental financial situation for your survivors, then you are self-insured.  Self-insured simply means you do not need to pay an insurance company to protect you or your survivors because, even if you experience a LTC event, your survivors will not be left with a financial hardship.
If you are self-insured, you do not need LTC insurance, and you certainly do not need to pay higher premiums for benefits that you do not need. 
If you are self-insured, buying the LTC insurance is not a need.  If you want to buy it, then it needs to be looked at like any other discretionary expense, like a vacation for example, to see how the additional expense impacts your other goals and your overall financial picture. 

Calculating if/when you will become self-insured:

Some people are clearly self-insured right now.  For examples, as we said above, if someone has no survivors, or the survivors are not financially dependent on them, they are already self-insured and do not need LTC insurance. 

But others may need to do some math to determine their status of self-insured.  How do you determine that?  You need to run the numbers.  Here’s what I do for my clients:

I run LTC events at various ages for each spouse.  Each LTC event is 5-years long, costs $100k each year (inflation adjusted), and is followed by death.  If the numbers show that after such a LTC event, the survivor is financially stable, that demonstrates that a client is self-insured. 

Using Life Insurance for your LTC strategy:

The reason I run LTC events at various ages is because we may discover that a client is not self-insured for a LTC event early in retirement, but they may eventually become self-insured at some point in the future.  For example, it may be a client doesn’t have sufficient assets to self-insure at age 60, but will have sufficient assets at the age of 75.  If a client will become self-insured in the future, then they may not need LTC insurance at all – they may be able to suffice with life insurance. 
As radical as it sounds to use life insurance as your LTC strategy, it makes sense.  The LTC event is expensive and will deplete assets, but if the LTC patient passes away and they have life insurance, the life insurance will replenish the assets that were depleted.  Just as LTC insurance is used to preserve assets for the survivor, Life Insurance is used to provide assets for the survivor. 

For someone who is not self-insured now but will be in the future, they just need to buy themselves time.  In due time, their assets will have grown (and their longevity will have decreased) and they can use those assets to self-insure.  Life Insurance can help to buy the time needed to self-insure.  So, for example, if someone is not self-insured at age 60, but will be self-insured at 75, they can employ a 15-yr term life insurance policy to cover the cost of an LTC event. 

I have found term-life insurance policies to be less expensive than LTC policies (but price will obviously be affected by health).  (I have also found, in rare cases, that someone’s health condition may get them declined for LTC insurance, but is not decline-able for life insurance.)  Furthermore, LTC policies are exposed to these premium hikes; Life insurance policies are not. 

Another Strategy for those who will be Self-insured in the future:

Calculating your future ability to self-insure may also demonstrate that you can let your current LTC coverage decrease gradually over time.  This may give you permission to opt out of the inflation increases that you originally purchased.  The costliest ingredient of your LTC policy is the inflation protection.  Granted, the inflation protection increases your future LTC benefit, however, many years from now your assets may have grown, decreasing your need for LTC insurance.  If you anticipate your assets increasing, you can opt for a reduced inflation benefit, and allow your assets to make up the difference.

Client Cases in point:

Below, I provide a few client cases for you to see how I help clients navigate this LTC ultimatum. 

Case #1 – This client is single and has no dependents.  As such, they really don’t need LTC insurance (unless they have a stated goal of preserving their assets for someone, or some organization (charity), which they don’t).   If they have a LTC event, it will erode some, or all, of their assets – which seems awful – but again, who are they trying to preserve assets for?  Dropping the LTC insurance altogether is acceptable.  Opting for reduced benefits is unnecessary, but if the client wants it, it’s also acceptable. 

Case #2 – Another single client who has no dependents.  They don’t need LTC insurance However, they are very uncomfortable with the idea of relying on Medicaid. 

We ran the numbers and showed that they were not able to self-insure.  Since they don’t want to rely on Medicaid, they needed some type of LTC coverage.  However, this client’s cashflow was very tight – there was no room to increase expenses.  So, the option to raise their LTC insurance premiums was not really an option.  

The option of stopping the insurance altogether, would lower expenses, which was actually a good thing for that client’s overall plan, but obviously doesn’t mitigate the LTC risk.  

Keeping their current of premiums was acceptable.  It doesn’t raise their expenses, and it also is a substantial step toward risk mitigation.  That seemed like the most sensible option.

Case #3 –  A married couple, that has plenty of investment assets.  They actually can easily afford to pay the higher LTC premiums.  However, they are annoyed that their premiums keep getting jacked up, and they resent that. 
We ran the numbers and they can self-insure on a LTC event, whether the event happens early in retirement, or later in retirement. 
Since these clients don’t need LTC insurance – they are self-insured – they can drop the insurance altogether.  If they keep it, it’s just their decision to spend money to make them feel comfortably insured – even though they will likely face this premium-increase again, down the road

Case #4 –  A married couple with a decent amount of assets, and the husband has a size-able pension.  Their retirement income is very strong, and they, too, can afford to pay the higher LTC premiums.  They also resent that their premiums keep getting jacked up. 
We ran the numbers and they can self-insure if the wife has an LTC event (because, even if it depletes some of their assets, the husband will retain his size-able pension), but if the husband was to have an early LTC event, it would be problematic. 
In this case, the wife could drop her LTC insurance.  However, the husband needs some coverage for an early LTC event.  The husband should look into a term-life policy to buy time to grow assets.  If he can get the term insurance, he can drop his LTC insurance completely. If he cannot get life insurance, he can accept the lower LTC benefits with reduced inflation option.  This will give him strong coverage in the near-term, which over time will weaken, but at some point in the future he’ll be self-insured and will no longer need any LTC insurance.   

I hope this helps!

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