Long-Term Crunch

If you're enrolled in the Federal Long-Term Care Insurance Program and you're like me, you're procrastinating about making a decision on whether to change your current policy or to accept new higher rates.

The new rates, which go into effect March 1, will affect enrollees with the automatic compound inflation option who were 69 or younger when they signed up and who choose to keep the same coverage they have now. The deadline for making the choice is Feb. 15.

Whether you are facing that deadline or simply considering the purchase of a long-term care policy, this week I'll try to answer some of the questions you should consider. Whatever your situation, the easiest thing to do is nothing. But you might regret that down the road.

Before we get started, let's get some basic facts out of the way. Long-term care insurance provides a resource to pay for custodial and personal care that might be needed as a result of an illness or an accident that leaves you needing personal assistance or supervision. Such insurance requires underwriting. If you are not in the best of health or have a pre-existing condition that could result in needing long-term care in the future, you might not qualify for a new policy. If you currently own a policy, you can decide among the new benefit options available without going through the underwriting process.

What Should I Expect to Spend?

If you are facing a 25 percent increase on March 1, then you probably were expecting to spend 25 percent less than you will be paying next month. But the real question is whether such an increase is reasonable and acceptable to you, considering your own financial situation and health.

In my opinion, as with most things, you get what you pay for. The Federal Long-Term Care Insurance Program is priced competitively with other policies available on the private market. Of course, you might be able to get a discount from a private company for good health or for buying a shared policy with your spouse.

Before you decide how much to spend, make your best guess about how much care you might need. This will be determined by the following factors (most of which are unpredictable since presumably you currently are not in need of this care):

• What is the cost of care in your area? Care in a large metropolitan area generally will be more expensive than in a small town. Use this tool to find out the cost of care.
• Is it likely that you will have family members or others available to help provide care? In this case, you might be more interested in having a resource to pay for caregiver relief on occasion, rather than full-time help or for a stay in a nursing home.
• How much do you have in assets that you are trying to protect from being spent on your future care? In other words, how long would it take to spend your assets down to poverty level? The more you're trying to protect, the larger the benefit you'll need.
• How much extra income will you have available to pay for your care, if needed, on a daily basis? Basically, can you pay for care yourself without insurance? Remember the cost of care can be more than $10,000 per month.

What's the Best Choice for Inflation Protection?

In the FLTCIP, you now have three choices: 5 percent automatic compound inflation; 4 percent automatic compound inflation; and the future purchase option, under which premiums will increase every time you accept an increase in your benefit.

Here are some things to think about when deciding among these possibilities. From now on, under the FPO option, every two years you will be offered a higher benefit if there is a change in the Labor Department's Consumer Price Index for Urban Consumers. This option is initially much less expensive than the compound inflation options. For example, a 52-year old who is buying a $200-a-day benefit for a five-year benefit period would pay $164.35 a month for a 4 percent compound inflation option, $222.84 a month for the 5 percent version, and only $63.18 a month initially for the FPO.

But under the FPO, if the premium increased 3 percent per year, the premium would double every 24 years. If the increase was 6 percent per year, the premium would double every 7.2 years. How much it actually increases depends on inflation. The risk is that in the future, you might not be able to afford the increases and the cost of care could continue to rise.

For the compound inflation options, we now know that nothing is guaranteed. But every year, there will be an adjustment of the benefit without an automatic adjustment to the premium. If a future premium increase is necessary, then you could choose to accept the higher premium or to change the benefit value.

If you're young, the automatic inflation options are more important since your life expectancy is longer. After 40 years, the 1 percent difference in the inflation adjustment in the 5 percent option makes it almost 50 percent greater than the 4 percent policy. Using this logic, the FPO makes sense for an older enrollee, 4 percent might work for someone between the ages of 55 and 70, and those under 55 might want to consider the 5 percent option.

But age isn't the only factor. Also consider your current health, family history and future income sources -- such as an inheritance or investment growth -- when you're thinking about how much insurance you might need.

How Much of a Daily Benefit and Benefit Period Should I Buy?

The daily benefit amount is the limit on how much can be spent per day for care. The benefit period is the length of time the policy would last if the maximum daily benefit was spent each day. So, decisions about the two factors go hand in hand.

The value of a policy is determined by multiplying your daily benefit amount by the benefit period to determine your pool of money. For example, if you purchase a $250 daily benefit for a three-year benefit period, you have bought $273,750 worth of benefits. You could get the same value by purchasing a $150 daily benefit for five years.

Now look at the premiums for these two policies: The $250 option would cost a 52-year old $167.92 per month in premiums with a 4 percent automatic compound inflation option. The $150 option would cost the same person only $123.64 a month. The pool of money is the same for both, but on the second policy, the daily benefit is capped at $150. If the care you need costs more than that, you won't have the flexibility to use more of your benefit to pay for it.

Some things to consider:

• Even if you have a caregiver available in your network of friends and family, you still might need insurance to pay for a relief caregiver on a part-time basis in your home. In this case, a smaller daily benefit for a longer period of time could work.
• If you want the option to receive more expensive care if needed, the larger daily benefit will give you the resources to pay for it. This could make the difference in, say, receiving care in a nursing home or requiring family members to devote a big part of their life to caring for you at home.

Is That All?

Unfortunately, no. Buying long-term care insurance is not as easy as 1-2-3. There are other considerations, such as whether a plan is tax-qualified -- meaning, among other things, the benefits you receive won't be taxed. (The FLTCIP is tax-qualified.) Some plans don't cover international benefits. (The FLTCIP does). Then there's the possibility of changes to the way you might receive long-term care, the federal government's role in the process and uncertainties about future costs. These are difficult to predict.

In part, my goal with this column was self-centered. I'm trying to decide what to do with my own FLTCIP policy. (Why do you think I used the example of a 52-year old?) But even if you're not facing the Feb. 15 deadline because you don't have long-term care insurance, it's worth thinking about these issues. So do your homework. Start with the official FLTCIP site, or refer to one of my previous columns on the subject:

• Buying Long-Term Care Insurance Oct. 16, 2009
  
• Long-Term Care Considerations Oct. 9, 2009
  
• Long-Term Change May 15, 2009
  
• Long-Term Planning July 25, 2008
  
• The Long Haul: Part Three Aug. 11, 2006
  
• The Long Haul: Part Two Aug. 4, 2006
  
• The Long Haul: Part One July 28, 2006

CORRECTION: The original version of this column indicated that with the compound inflation options, every year there will be an adjustment of the benefit if there is inflation without an automatic adjustment to the premium. The words "if there is inflation" should not have been included. The column has been updated to correct the error.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.