CalPERS is considering imposing a 75 percent increase in premiums on the vast majority of its long-term care policyholders. They would pay hundreds of dollars a year more – thousands, in some cases – as the California Public Employees' Retirement System tries to fix financial holes in the program.Unfortunately this was not difficult to see coming, I wrote the following back in 2006:
Customers would be offered a less comprehensive policy as a cheaper alternative. Still, the prospect of a big hike, which would take effect in July 2015, is rattling nerves.
When I first started in the business of working with educators I can across the CalPERS Long Term Care program and generally liked it. I even recommended it because the premiums were so low.
However, as I learned more about long term care insurance and learned more about the CalPERS plan I began to recommend that clients buy a policy from a private insurer. My reasoning was that CalPERS was not charging enough and that they would have to raise premiums at some point, in addition, they are not an insurance company and are required to abide by the same rules that govern insurance companies. I didn't like the lack of safeguards nor the fact that premiums would have to increase.
I thought CalPERS was basically attempting to buy the business with low premiums. I want to make clear that I am not accusing CalPERS of market manipulation. I actually believe their intentions were sincere and they thought their policies were priced appropriately.
The fact remains that I am not an actuary, yet I knew several years ago that the premiums would have to rise, sure enough in 2003 CalPERS raised the premiums by an average of 17%.
Even after the premium raise I remained skeptical, and still do. Now CalPERS is proposing to raise the premiums by nearly 34%. This means that for every $100 in premiums, policyholders will be paying $57 more than they were paying in 2002, a 57% increase. Had policyholders known this they may have opted for a private insurance policy that was more expensive at the time, but provided better benefits and a better future in terms of rate increases.
I want to make something very clear - I do not sell Long Term Care Insurance and I don't recieve any money from the insurance industry or insurance agents. I don't have a vendetta against CalPERS because I lost insurance sales, I am just concerned for the public employees who purchased this policy in good faith.
It is my opinion that CalPERS is in over its head and needs to reform the Long Term Care Insurance Plan. My advice is that they do not institue the 34% increase yet, instead they embark upon a plan where they outsource their long term care program to a private insurer and continue to sell it as a private labeled plan. The private insurer chosen can then put together an accurate assesment of the real costs and a discussion of rate increases can continue. I believe rates must be increased, but I don't feel comfortable with the management of this plan by CalPERS.Most long-term care insurance companies are coming under pressure to raise premiums or cut benefits, so it's likely that even my solution would not have staved off the increase, but this was easy to see coming.
Just my two cents...
Scott Dauenhauer CFP, MSFP, AIF
