CalPERS Long-Term Care Insurance Review

Thang Truong
Thang Truong
Updated on:

The traditional long-term care insurance market has undergone something of a mass exodus in recent years. There used to be over 100 companies offering long-term care insurance, and now there are only about twelve, with more leaving every day. This is unfortunate, as the baby boomers are reaching a point in their lives where long-term care insurance would be a smart purchase. Many elderly Americans will need some type of long-term care in the future, so why have so many companies left the market? We’ll take a look at that, and at CalPERS (California Public Employees’ Retirement System) long-term care insurance in particular. 

History of Long-Term Care Insurance

Back in the 1990’s, long-term care insurance was the next big thing, as far as insurance goes. It seemed to make sense—protect your nest egg by buying insurance in case you need such care in your golden years. Companies priced these policies based on their limited knowledge of long-term care. Some of the things that they failed to take into account included:

  • More people were going to keep their LTC insurance instead of letting it lapse
  • Rising costs of long-term care which have outpaced inflation 
  • People are living longer and sometimes need long-term care for a longer period of time
  • Low interest rates hurt investor portfolios
  • They assumed customers would not want to enter nursing homes, even if they had LTC insurance

They priced these policies lower than they should have, to be attractive to consumers and to be competitive (remember, there were over a hundred companies offering this insurance). 

When they realized their pricing errors, not to mention the fact that insurance companies were losing money on this insurance, they adapted. They increased rates. They increased rates so much—often by as much as 80% or 90%, that customers were infuriated.

Imagine you purchased a long-term care policy in 2000. You knew long-term care might be an eventuality for you and your spouse, as you were both in your early 50’s. Your premiums were a very comfortable $100 a month for the two of you. You felt you had prepared for the future. 

Fast forward to 2015. Your insurance company sends you a letter, saying rates are going up. This comes as a surprise, as you had originally purchased inflation protection. Now rates are increasing by a lot—80%, so now your premiums are going to be $325 a month. You can’t afford this, and this increase comes at a terrible time, just when you and your spouse are in your early ‘70’s and increasingly likely to need long-term care. You had to decide whether you were going to struggle to pay the premiums to let the policy lapse. 

Many customers filed class-action lawsuits, which is what happened to CalPERS. 

This is one of the main reasons why many companies stop offering traditional long-term care insurance. And more companies are now offering hybrid long-term care insurance product, which is a combination of life and long-term care insurance.

>>MORE: The Best Hybrid Long-Term Care Insurance Companies

CalPERS Long-Term Care insurance

CalPERS sold about 150,000 traditional long-term care insurance policies, starting in 1995. They marketed these policies as being 30% cheaper than the competition and said this was possible due to their management of such policies and investment returns. That was an exaggeration. 

CalPERS long-term care insurance plan was grossly underfunded. They tried to compensate by seeking out risky investments, but those resulted in more losses. 

In 2012, they raised rates by 85%, although they split the increase over two years, 2015 and 2016. Policyholders asserted that this was a breach of contract, as they had been told that their rates would never rise if they bought the inflation protection. 

If the courts find for those plaintiffs, CalPERS could lose as much as $1.2 billion dollars in damages. 

>>MORE: The Best Traditional Long-Term Care Insurance Companies

Why Did CalPERS Stop Offering Long-Term Care Insurance?

As of June 17, 2020 CalPERS will no longer be selling long-term care insurance. Applications that were still in process will not be approved. 

They still manage pensions, retirement benefits and health care for public employees in the state of California. It’s the nations’ largest public pension fund, with more than 2 million members in the retirement system and 1.5 million members in the health program. 

Due to the pandemic and other reasons, CalPERS lost about $67 billion dollars between January and March of 2020. This put even more pressure on them to make better investments and recoup their losses. 

To get themselves out of the hole that they found themselves in, CalPERS is thinking of getting into banking, focusing on private equity and private debt. Another thing of concern about CalPERS is that they might have violated the Bagley-Keene Open Meeting Act, as they discussed all of this behind closed doors. There is also some concern that private equity and private debt are extremely risky ventures and this is a particularly terrible time to invest in them. 

In August, Ben Meng abruptly left his position as investment chief, amid accusations that he sought investments that benefited him personally rather than the company and its investors. 

Last Thoughts

Any way you look at it, CalPERS is in flux financially. They have leveraged funds they shouldn’t be leveraging and investing in possibly high-risk ventures. They need to meet a 7% gain every year, or residents of California will be forced to pay more in taxes to make sure that CalPERS can meet its financial obligations. We could go on and on about CalPERS and their financial outlook—it’s fascinating. They’re not alone in abandoning long-term care insurance, and we anticipate more companies getting out of this business in the future, due to the losses it incurs. It’s too bad, but for long-term care insurance to be profitable, it would be priced so high that no one could afford it. 

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

More Stories

6 Best Indexed Universal Life Insurance (IUL) for 2023

Are you looking for a way to set aside some extra money for your senior years, and maybe a little extra for loved ones to inherit? Most people opt for indexed universal life insurance because it offers the greatest cash value growth tied to the performance of S&P 500 index with the least risk thanks […]

Best Self-Directed Roth IRA Companies for 2023

A self-directed Roth IRA is much like a regular Roth IRA, but offers more flexibility as far as what you can invest in. Whereas a regular Roth will only let you invest in stocks, bonds, mutual funds, ETFs, and real-estate investment trusts, a self-directed Roth lets you invest in a greater variety of investment options.  […]

The 5 Best Hybrid Long-Term Care Insurance Companies for 2023

If you’ve decided to plan for every eventuality, you’d be smart to include a plan to cover long-term care. Someone turning 65 this year has an almost 70% chance of needing some type of long-term care, and about 13% of those will need it for five years or more. Long-term care is expensive and can […]

The 3 Best Traditional Long-Term Care Insurance Companies for 2023

Long term care is something that no one likes to think about, but unfortunately, many people will eventually need. Health care costs are skyrocketing, and a lengthy stay at a long-term care facility can easily bankrupt most people’s nest eggs. Long-term care insurance is one way to protect both yourself and your retirement savings. Out […]

The Best Long-Term Care Insurance Companies in California for 2023

California residents who are keen to protect themselves and their families against the worst events in life may be considering long-term care insurance. However, you might not know much about LTC insurance or how it is handled in California. Let’s take a look: What is Long-Term Care Insurance? Long-term care insurance helps pay for long-term […]

The Best Long-Term Care Insurance Companies in Arizona for 2023

Arizona is a great place to retire. It’s warm, there’s no snow to shovel, and Arizona improves the quality of life for anyone with allergies or asthma. When you pack your bags and retire to Arizona, you’re probably not thinking about long-term care. But the sad reality is that 47% of men and 58% of […]

The Best Long-Term Care Insurance Companies in Florida for 2023

There’s a lot of good reasons to retire in Florida. The weather is warm, the beaches are beautiful, and there are lots of other retirees to socialize with. Also, Florida has no state income taxes, no inheritance taxes, and no estate taxes. When you pack up your things and move to Florida, you’re probably not […]

Private Placement Life Insurance: Everything You Need to Know

If you haven’t heard of private placement life insurance, you probably don’t qualify to buy it. Private placement life insurance is typically for investors with millions in liquid cash that they need to invest for tax reasons.  What is Private Placement Life Insurance? Who Qualifies for Private Placement Life Insurance? Benefits of Private Placement Life […]

Nationwide IUL – A Strong Product With Great Features and Excellent Ratings

The Nationwide IUL product can help you either supplement your retirement income or ensure your beneficiaries future by leaving them a nice tax-free death benefit. Obviously, you have many options when it comes to IUL policies, so you want to know how does Nationwide’s policy stack up against the competition? Let’s take a look. Pros […]

Transamerica IUL – A Solid Product but High Consumer Complaint Score & Law Suits

Consumers looking to supplement their retirement income often settle on an indexed life insurance policy. These policies build cash value based on market performance and allow your heirs to enjoy a tax-free death benefit. Let’s take a look at Transamerica’s indexed universal life insurance policy and see what makes it stand apart from other such […]