The introduction of the Federal Long Term Care Insurance Program in 2002 brought home to many active and retired federal workers the need to plan for the financial burden associated with long-term disability, whether related to age, accident or other causes. The cost of long-term care — including care in nursing homes, assisted living facilities, adult day care centers and at home — is high, currently averaging $52,000 per year at nursing homes, according to the Web site for the federal program. This high cost, combined with the risk of disability that increases with age, is one of the top financial threats to Americans over age 65.
At the same time, the costs and benefits of long-term care insurance mean its purchase is a major financial decision. Premiums could total an estimated $10,000 or more during the owner’s lifetime, but bring potential benefit payments of hundreds of thousands of dollars. Contracts are often long, detailed and complicated, and it’s important to do the homework necessary to ensure that your expectations will be met should you ever need to file a claim. Federal employees, retirees and their families have access to a unique group insurance program, and they should take time to compare it with private-sector offerings.
Quite a bit of research and reporting has been done on the topic during the past two years, but not all of it can be trusted to serve your best interests. Much of what is presented as unbiased advice is a thinly veiled sales pitch. However, some of this information, if viewed through a critical eye, can be useful in evaluating your options.
In the interest of full disclosure, I am the founder and administrator of the Senior Executives Association’s long-term care insurance program. I have helped hundreds of federal employees shop for and purchase long-term care insurance. Below is a summary of the major differences I have found between features of the Federal Long Term Care Insurance Program and one of the better individual policies on the market today — John Hancock’s Custom Care II policy. I also offer guidance on the importance of each feature when choosing a plan and my opinion on which plan’s features are more advantageous. While other features could be compared, these have proven most influential in my clients’ evaluation process.
The insurance carrier
The federal program is managed by the Office of Personnel Management and underwritten by a partnership between MetLife and John Hancock Life, two large, respected insurance carriers. While this is reassuring, the companies are under a seven-year contract to underwrite the program and may be replaced later. In addition, the program must be completely self-funded, including the cost of administration. This means that, like any long-term care policy, the federal program carries the risk of future rate increases or reductions in benefits.
Additionally, the federal program is exempt from state insurance regulation; OPM effectively acts as the regulator over the insurers. Individual policies and rates, on the other hand, are regulated by the states in which they are sold.
Importance: High.
Advantage: Neither. The stability, reliability and competitiveness of either type plan are nearly impossible to predict.
The contract
As with all group insurance programs, participants in the federal program receive certificates of coverage summarizing the terms of an agreement between OPM as the policy holder and the private insurers administering the program. To the extent that this agreement can be revised, benefits to the participants may change. For example, when the current contract expires, it is possible that new or follow-on agreements may change the terms of coverage. This is possible at every contract expiration.
Individual policies are contracts between the owner and the insurance company and generally may not be changed by the insurer without the written consent of the policy holder. Even in the event that the insurer fails, it is reasonable to expect that the contract will be sold or assigned to another insurer intact. So the nature of the individual insurance contract provides a higher level of predictability than a group contract.
Importance: High.
Advantage: Individual policy
Rate classes
Rate classes are used by insurers to group their applicants according to the risk to the insurer, based on health and lifestyle characteristics. The federal program offers only one rate class: standard. So if you don’t meet the health requirements for this rate, you must be declined coverage. If you’re in especially good health, you will still be offered the standard rate. Some individual policies offer two substandard rate classes and one or two preferred rates, in addition to the standard rate.
If your personal circumstances indicate a risk level outside of that defined by the rate class or classes available, the insurer must decline your application. The more rate classes available, the wider the range of risk that is acceptable. You may also benefit from a lower premium if you are in exceptionally good health and are offered a preferred rate on an individual policy.
Importance: High for those qualifying for other than a standard rate.
Advantage: Individual policy.
Benefit periods
The benefit period, also called policy limit, is the length of time that the policy can be expected to pay benefits. The federal program offers a choice of three benefit periods — three years, five years or lifetime. Most private policies offer a wider choice ranging from one or two years to eight or 10 years to lifetime. This allows more precise customization and a wider range of premiums.
Importance: High.
Advantage: Individual policy.
Benefit amounts
The federal program offers daily benefit limits in $25 increments. Individual policies often offer benefit limits in $1 or $10 increments. The federal program’s limited options restrict the ability to tailor the coverage to individual needs.
Importance: High.
Advantage: Individual policy.
Home care benefits
The home care daily benefit under the federal program is limited to 75 percent of the nursing home daily benefit. Most private policies will pay 100 percent — up to the benefit limit — in any covered care setting. This is important because home care is more popular than facility-based care — and much more expensive when compared on an hourly basis. In fact, when you account for overnight shift rates, aroundthe-clock home care can be as much as four or five times more expensive than a day in a nursing home. Given consumers’ overwhelming preference for home care, these policies should be considered home care policies first, with nursing home coverage available as a fallback when the costs of increasing amounts of home care become unaffordable. Cost is what most often drives people from home care into facility-based care, and higher home care daily benefit limits mean that you can stay at home longer while receiving care.
Importance: High.
Advantage: Individual policy.
Care by family members
The federal program may provide benefit payments for care provided by family members not living with the enrollee at the time eligibility is determined, in addition to care by friends, neighbors and others who are not formally licensed. The benefit is paid at the home care daily rate. This benefit is hard to match in a competitive individual policy.
Importance: Moderate.
Advantage: Federal program.
Benefit sharing
Some insurers have addressed the needs of married couples by offering policies that permit them to share a common benefit pool or exchange benefit dollars between them, at their discretion. For example, if a husband and wife each purchase a policy with three years’ worth of benefits, and the husband exhausts his own policy, his wife can provide benefits from her policy to continue to offset her husband’s expenses. In this case, with two, three-year policies, either spouse could cover up to six years of expenses. This option provides flexibility in using the couple’s combined insurance benefits and effectively addresses the fact that long periods of care are more likely for one spouse than for both.
The federal program does not allow for benefit sharing between policies.
Importance: High for married couples.
Advantage: Individual policy.
International coverage
The federal program offers reimbursement of up to 80 percent of the policy limits for up to 10 years for care received overseas. This is more generous than most individual long-term care policies. Some offer no international benefits, while others offer reduced benefits over a few years.
Importance: High if you’re likely to receive large amounts of care overseas.
Advantage: Federal program.
Acts of war
The federal program does not exclude acts of war from its coverage. Every major individual long-term care policy denies claims for long-term care needs caused by an act of war.
Importance: High if your occupation exposes you to this type of ris
Advantage: Federal program.
Catastrophic events
The federal program contains a clause that allows it to pay reduced benefits if the program suffers financial stress caused by a large number of claims originating from a common, catastrophic cause. No leading individual policy carries this type of clause.
Importance: High.
Advantage: Individual policy.
Drugs and supplies
The federal program provides limited coverage for drugs and supplies consumed while in a facility. Few individual policies provide comparable benefits.
Importance: Moderate since drugs may be covered under the Federal Employees Health Benefits Program.
Advantage: Federal program.
Inflation protection
The federal program offers a compounding automatic inflation protection option. Many individual policies offer additionally a simple inflation option, with equal rather than compounded increases in benefit levels each year.
Compounding is a better option in that it accelerates increases over time and results in higher values than simple increases. It is also more expensive than the simple option. Younger people, because of their long planning horizon, should always choose a compounding increase option.
As an applicant ages and his planning horizon shortens, he can consider substituting a lower-cost option, such as the simple increase option. This is because the values produced by the simple and compound inflation options are fairly close over periods of as long as 15 years. Applicants age 70 or older may want to rely on the simple increase option to reduce the policy’s cost.
Importance: Moderate in some cases.
Advantage: Federal program or individual policies with compounding option.
Elimination periods
The federal program offers two elimination, or waiting, periods — 30 days and 90 days. This is the deductible obligation, measured in dates of service, which you must pay at your own expense, before the policy begins to pay benefits. Individual policies are available with a broader range of deductible periods — as short as zero days and as long as 365 days or more. As with other types of insurance, larger deductibles equal lower premiums.
Importance: Moderate.
Advantage: Individual policy.
Cost
With recent increases in premiums and other changes in the new policies being offered on the individual market, the federal program has become more cost competitive than when it was first rolled out. It is impossible to generalize about cost, since there is a wide range of variables that affect each case. Costs in long-term care insurance vary widely, depending on the circumstances and benefits selected. The only way to know is to conduct a thorough comparison.
Importance: High.
Advantage: Federal program or individual policy, depending on the circumstances.
Written by Mike Miles
For the Federal Times
Publication August 23, 2004