Last week I discuss the importance of planning for the cost of long term care when it is provided rather than today’s costs. Another area that may create a false sense of security in my opinion, are group long term care (LTC) plans offered by employers. While every group LTC plan may be different, many of the actual group policies are structured the same, and it is in the product design that may create future problems.
Group LTC plans are enticing due to their pricing. But, pricing alone does not make a great solution. Since these group plans are offered to employees, almost everyone electing to participate is under the age of 65, thus the occurrence of a claim by employees while they are still working is relatively small; hence, the premiums are low. But, they are low for other reasons as well.
I recently was reviewing a group plan for a retiree and new client. They were trying to decide whether they should accept an increase in benefits which also came with an increase in the cost of the plan. When I reviewed his plan, I uncovered the typical problem with group plans. When my new client opted into this group coverage years before while working, the plan offered inflation protection and a 90 day waiting period before benefits were to be paid. Upon reaching age 65, my client and his wife each had $3,000 of benefit per month from their group plan. However, upon reaching age 65 the automatic increase in benefits of five percent to protect against inflation stopped. To continue inflation protection the plan stated it had future benefit purchase options available. This meant benefit increases were to be offered in three year intervals but had to be purchased at the then attained age if elected. Hence the problem.
Upon reaching his 68th birthday, the plan offered an increase in benefits of $600/month for an additional $234 in annual premium. While no proof of insurability was required to take this offer, if my client declined the increase, then to be able to increase benefits in the future when other offers became available, he would have to prove he was still insurable by qualifying for the increase. Not a great place to find oneself.
When my client opted into this plan years ago, he thought he was doing himself a favor, not realizing he was getting into a plan that guaranteed increasing premiums once he retired. And the group plan attracted his interest due to the low costs, even though individual plans offering far more benefits would also be reasonable due to his current young age at the time.
Now, my client was facing a 20 percent increase in benefits for a 34 percent increase in costs. Clearly, he needs to continue to increase benefits, because if a claim occurs when he is 88, the potential cost of care then will be $12,000 per month. If he does not increase his current plan’s benefit, a monthly benefit $3,000 will be a drop in the bucket compared to the actual costs. Now he is wondering what the real cost of his group protection will be as he faces six more optional benefit increases between now and age 88; with each increase being offered at a rate based upon his age at each offer date.
To have a plan in place where the premium will go up every three years during retirement is not the best solution. My guess would be most retirees eventually say no to increases in benefit due to the increase in premiums. And then when a claim occurs, they have to pay more of the actual costs since their benefits failed to keep pace with inflation. It would be far better to design coverage early and be subject to potential rate increases rather than guaranteed rate increases.
Individual plans when designed properly provide many benefits beyond what group plans offer. Thus, the peace of mind of having long term care insurance may actually be real, rather than a false sense of protection provided by many group plans.
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