Federal long-term care plan should be top option

The Federal Long-Term Care Insurance Program increased premiums for its automatic compound inflation option as much as 25 percent last year, a move that angered many participants. But, in my view, the program just became more attractive, compared with retail alternatives, and should be considered the benchmark when comparing long-term care insurance.

That’s because John Hancock has announced that it will seek rate increases that average about 40 percent on many of its retail long-term care policies.

That’s a surprising number since John Hancock’s policies were never widely known for being relatively cheap. In fact, years ago, I identified John Hancock as one of the premier providers of long-term care insurance based on a screening system that paid particular attention to the company’s willingness to charge enough for the risk it accepts in writing the insurance.

Relatively cheap premiums are a warning sign that a company may be underpricing its policies to win business, only to have to raise premiums to more reasonable levels later. John Hancock was one of a handful of companies that appeared the least likely to require large future rate increases.

But, from my original list, the largest and apparently most stable long-term care insurance providers have raised rates, sold off their business or otherwise made themselves less desirable as insurers. John Hancock was the last to fall.

This event is important, not only for its effect on John Hancock policy holders, but for the warning it provides for long-term care insurance customers, in general. That includes customers of the federal program, which is run by John Hancock.

The Office of Personnel Management said there will be no changes in 2011 in premiums in the federal program.

Long-term care insurance is designed to provide reimbursement for expenses incurred as the result of disability, usually in old age. The cost of custodial care — nonmedical help with the activities of daily life, like dressing or bathing — can be devastating. This kind of care can cost $50,000 or more a year in many parts of the U.S.

During the last 10 years or so, attention to this risk and to long-term care insurance has exploded. Insurance companies have poured money into marketing campaigns. Legislators have proposed, and in some cases, passed legislation to encourage the purchase of insurance. And in 2001, the Office of Personnel Management established the federal program to make long-term care insurance readily available to most federal workers, annuitants and their families.

Long-term care insurance is typically sold with a level premium — a premium that is set when you buy the policy and that is intended to remain the same for as long as you keep the coverage in force. Future premiums are not guaranteed, however. For many retirees, increasing premiums will mean that the insurance is more likely to become unaffordable, and allowed to lapse, just as the insurance is needed most.

John Hancock says greater-than-expected usage is one of the primary drivers behind its proposed increase. It must receive permission from state regulators before it can raise premiums on existing policy holders. The company is unlikely to get everything it is asking for, but higher rates are clearly coming for retail policyholders.

Those who hold long-term care insurance policies, or those who consider buying them — from any source — should take this news as a wake-up call, and factor substantial rate increases into their plans. If a policy won’t be easily affordable at twice the price, you should consider reducing coverage to be affordable, or dropping the insurance altogether. It is still possible today to manage long-term care without private insurance. Don’t forget that Medicaid will provide you with care, if it is otherwise unavailable or unaffordable to you.

The Federal Long-Term Care Insurance Program’s competitive pricing and benefits, combined with OPM’s advocacy for the interests of its constituents, make the program the best choice for many federal employees and annuitants. It should be the starting point for your long-term care insurance shopping and comparison.