LTCi Rate Increases: A Shock for Federal Employees

Many federal employees are learning a painful lesson in the wake of an announcement that the Federal Long-Term Care Insurance Program (FLTCIP) will implement substantial rate increases.

This summer, officials said the average 83% increase will result in an average hike of $111 per month for the some 274,000 current and retired federal employees enrolled in the program.

John Hancock, the insurer for the FLTCIP, is not alone among long-term care insurance (LTCi) carriers that are running into headwinds. But given the scope and size of the FLTCIP, a rate increase of this magnitude is unprecedented.

LTCi is a “long-tail” insurance program, meaning it could be decades before claims are incurred. Accordingly, the low interest-rate environment has hurt many LTCi carriers by making it difficult for investment income to keep pace with anticipated long-term liabilities.

In its justification for such a large premium increase, however, John Hancock said “enrollee persistency has been higher than initially expected” [see sidebar]. Consumers may be able to understand the difficulty of anticipating longevity gains and low interest rates, but it seems counterintuitive to argue that a key factor behind the increase was insureds maintaining their coverage. Isn’t the whole point of the program to provide coverage when people need it most?

Although the lapse rate is a key assumption, the goal of an insurance company is to continue to promote the value of a program so insureds don’t drop coverage after years of paying premiums. The insurance company has a conflict between encouraging program participants to keep their coverage in place or letting it lapse, which lets the insurer off the hook for paying future claims.

Make sure you continue to monitor the FLTCIP and the LTCi marketplace in general in order to stay abreast of the rate activity—and advise your clients accordingly.

Dave Evans is a certified financial planner and an IA contributor.