Should You Accept an 85% Rate Increase?

I was recently contacted by a consumer in California. She and her 73 year old husband are facing an 85% rate increase with CalPers, the California self-insured plan for state employees. As horrendous as an 85% rate increase sounds, it becomes not so horrendous when you analyze it. Here’s the case study along with my advice:

Policy effective date: August 1, 2002

Issue age: 59 Current age: 71

Current benefits: $171/day for nursing home; $86 for assisted living; $2566 per month for home care/adult day care; Total benefit pool $375,209 (6 years)

Current monthly premium: $179.85           Monthly premium with 85% rate increase: $332.72

CalPers’ recommendation to lower or eliminate the rate increase: dropping the inflation coverage, or reducing the benefit period from 6 years to 3 years and still dropping the inflation coverage.

My recommendation:

Thank you for the opportunity to review your coverage. Here is an overview for you to consider:

• The CalPers long-term care insurance program was priced below the average for the rest of the market when it was first introduced.
• You were very, very smart to take it at that time and the smartest thing you did was to take the 5% compound inflation
• An 85% rate increase will take your premium from $179.85 a month to $332.72 a month
• If you pay that $332.72 a month for 15 years, you will pay $59,890.
• Your coverage in 15 years will double thanks to the 5% compound inflation to $342 a day.
• In 15 years when you are 87 years old, your benefit bank will be worth $748,980 ($342 x 365 x 6). It’s really worth more than that because each year it continues to grow at 5% compound and remember, it’s that amount for EACH of you, so $1.5 million for both.
• From where I sit, spending about $60,000 toi get about $750,000 in benefits seems like a very good deal.
• Notice that CalPers wants you to DROP the 5% compound inflation factor entirely. Please don’t do that.
• If you drop the 5% compound inflation, your daily benefit of $171 will stay the same and it only covers about 3/4 of the cost of care of today’s cost of about $220 for semi-private nursing home care. Think how short it will be in the future which will be about $440 a day in 15 years if historical trends continue!
• Your home care and assisted living facility care is set at 50%.  10 hours of home care costs about the same as a day in a nursing home and assisted living is at least $130 a day. This is even more reason why you should not give up your 5% compound inflation.
• If you still want to reduce your premium, ask if you keep the 5% inflation and reduce the benefit period from 6 years to 3 years. Just because that isn’t listed as an option in the letter doesn’t mean they won’t do it.  Or even to 2 years.
• You could also ask to have your inflation reduced from 5% compound to 3% compound.
• You are much better off to have a shorter benefit period and a higher daily benefit then a low daily benefit and long benefit period.  Why? Because the most important thing is whether or not you can pay the difference between what the insurance policy pays and the actual charge for care at claim time.
• Of course having said that, I don’t know you much you and your husband have in savings to supplement the CalPers policy so you will have to consider how much you can pay above the insurance policy.

To really put it in perspective, a couple 71 and 73 today would have to pay about $1500 a month for a plan with $170 daily benefit and a 6 year benefit period, and that’s assuming they were healthy enough to qualify for coverage. I ran that quote with Genworth, the largest company selling long-term care insurance in California and in the rest of the country. Genworth also has a nice cost of care survey that you can access at https://www.genworth.com/corporate/about-genworth/industry-expertise/cost-of-care.html

In summary, I’m recommending you take the rate increase if you can as that amount of coverage for that price is not available today for your ages.  If you can’t afford it, then consider the fall back to a shorter benefit period but keeping your 5% compound inflation or as a last resort, reduce your inflation from 5% to 3% compound.

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This formula for reviewing a rate increase can also be found in Chapter 2, “Where the Rubber Hits the Road: Premium, Underwriting and Claims” of my book Protecting Your Family with Long-Term Care Insurance pp. 139-143. You can easily get your own copy here.