Should Federal Employees Self-Insure for Future Long-Term Care?

For many federal employees and retirees, the question of needing long-term care (LTC) in the future is not a question of “if”, but rather a question of “when”. The real challenge for employees and retirees is how to pay for future LTC expenses.

According to LongTermCare.gov (a web site managed by the US Department of Health and Human Service) an individual turning age 65 today has almost a 70 percent chance of needing some type of LTC services and support in his or her lifetime. Furthermore, 20 percent of those same individuals will need it for longer than five years.

Unfortunately, there is much misunderstanding among individuals when it comes to who pays when an individual incurs a need for LTC. Health insurance and Medicare generally do not pay for LTC expenses including LTC provided in nursing homes and assisted living facilities, or for LTC services provided in one’s home.

Federal employees have two options available to them that could pay for required LTC services. One option is “self-insuring” in which individuals pay out of their pocket for the LTC they need. The other option is LTC insurance which helps pay for necessary LTC services at home, nursing homes, and assisted living facilities.

The purchase of an LTC insurance policy has become a challenge for two reasons, namely: (1) availability and  (2) affordability.

Fewer and fewer insurance companies offer individual LTC insurance policies. With individual LTC insurance, each individual (including spouses) has to apply and get approved. Both individual LTC insurance policies and group LTC insurance policies have skyrocketed in premium cost over the last five years to the extent that some LTC insurance policyholders have dropped their insurance enrollment because they can no longer afford the premiums.

Federal employees and retirees are no exception. Many employees who bought individual LTC insurance policies in the past can no longer afford to pay the premiums. Federal employees and retirees are eligible to apply for the Federal Long-Term Care Insurance Program (FLTCIP), established in 2001.

The FLTCIP has raised premiums several times over the past 20 years for both new applicants and current enrollees. In December 2022, the Office of Personnel Management (OPM) suspended applications for coverage under the FLTCIP, effective December 19, 2022 and continuing through December 19, 2024. OPM’s reason for suspending applications for the FLTCIP is to allow OPM and the FLTCIP insurance carrier (John Hancock Life and Health Insurance Company) the time to “thoroughly assess benefit offerings and establish sustainable premium rats that reasonably and equitably reflect the cost of the benefits provided”.

In the meantime, John Hancock recently announced that there will be premium increases effective January 1, 2024 for existing FLTCIP policyholders. A likely result of FLTCIP premium increases for current policyholders is that some FLTCIP policyholders – most likely federal retirees – will no longer afford to pay their new FLTCIP premiums and have to drop out of the program. Or they will have to decrease their policy benefits to the extent their LTC coverage will be minimal.

The Alternative of “Self-Insuring” Long-Term Care

The alternative to purchasing LTC insurance is to “self-insure”. Self-insuring means setting aside a sufficient amount of money to pay future LTC expenses. This may be the better alternative, especially if an individual will not incur much in LTC expenses, or any at all. It is also important to note that even if individuals who have LTC insurance do incur several years of LTC expenses, their LTC insurance policies may not provide full coverage due to policy limits or other restrictions. Self-insuring could then fill in any gaps in coverage.

5 Questions to Consider

The following are five questions for federal employees and retirees to consider about self-insuring for their future LTC needs:

1. Are you a good candidate to self-insure?

Generally speaking, wealthier employees and retirees with a high net worth (over 2.5 million not including the equity in their home) tend to be better suited to self-insure. Wealthier employees or retirees without dependents such as a spouse, a partner or children may have more cause to self-insure. In deciding whether or not to self-insure, one should consider that the median cost in 2021 for a home health care aid was $5,100 a month, according to Genworth Insurance Company’s Cost of Care Survey. The national monthly median cost for an assisted living facility was $4,500, and a semiprivate room in a nursing home was $8,000 a month. With self-insuring, all of these costs will come out of an individual’s pocket.

How do these expenses compare to the cost for LTC insurance?

According to the most recent annual analysis by the American Association for Long-Term Care Insurance a 55-year-od male, purchasing $165,000 of LTC benefits that are available to use immediately, could expect to pay, in premiums $900 a year. Adding an inflation growth option of 3 percent annually, the cost would be $2,100 annually. The cost for a 55-year-old female seeking the same level of benefits would be $1,500 and $3,600, respectively.

2. What are your financial goals?

Depending on an individual’s goals with respect to what they want to do with their financial assets after they die, they may not be in a position to self-insure for future LTC expenses. There are factors such as how many children they have and the parent’s desire to leave an inheritance. Another consideration is whether a parent is philanthropically inclined and wants to leave a significant amount of financial assets to their favorite charities.

3. Are your assumptions for self-insuring good?

Individuals have to be careful about making assumptions as to how long they will live or the type of care they may need. For example, they should not assume that they will die young because their parents and grandparents died young. On the other hand, they should not assume they will not develop dementia or Alzheimer’s disease if there is no family history of either.

4. Is there a “middle-of-the-road” option?

Individuals are encouraged to work with a licensed life/health insurance broker to find an affordable stand-alone LTC insurance policy.

Another option is a “hybrid” policy, which combines life insurance with LTC insurance. While a “hybrid” policy could be more costly, beneficiaries can receive a larger death benefit if LTC services are not used. Individuals might also consider a smaller and less expensive LTC insurance policy and self-insure a portion of their expected LTC costs.

5. Is “peace of mind” an important consideration?

Some individuals choose not to self-insure since they cannot “stomach the risk”. They would rather purchase a more expensive LTC insurance policy, covering five to seven years of LTC expenses, emotionally knowing that their future LTC needs should be taken care of. It is a trade-off that often comes down to “peace of mind”.

Would an individual be bothered if, at age 75, he or she had to go to a nursing home, paying upwards of $150,000 per year for 10 to 15 years. Even if the individual has the financial assets to pay for it, would the individual prefer that the money be reserved for something else like leaving an inheritance for children, grandchildren and/or great grandchildren, and/or make charitable bequests to their favorite charities?