As traditional long-term care (LTC) insurance becomes more and more expensive, and interest rates remain at ultra-low levels, planners and their clients have become increasingly interested in so-called "Hybrid LTC" policies that match together a life insurance or annuity policy with LTC coverage, especially with a more favorable set of tax rules that took effect in 2010. For many, though, the primary appeal of hybrid policies is the simple fact that, unlike their traditional LTC insurance brethren, the premiums really are guaranteed and cannot be increased in the future. Given some of the extraordinarily large premium increases that traditional LTC coverage has experienced in recent years - especially for some of the early policies issued in the 1990s and early 2000s - a cost guarantee is remarkably reassuring.

Yet the reality is that the guarantee of LTC premiums in a hybrid policy may be entirely offset by the fact that the insurance company controls the cash value, and is under no obligation to pay a going rate of return, especially if interest rates rise. In other words, it doesn't really matter that the insurance company can't increase the premiums on the policy by $4,000/year, when the company can simply under-pay on the interest rate by $4,000/year to accomplish the same result! And while the cash value of a hybrid LTC policy generally does remain liquid, taking a withdrawal to reinvest to get better, higher rates would entail surrendering the policy and forfeiting the LTC coverage! In fact, for some types of hybrid LTC policies, the arrangement contractually provides no rate of return to the client at all, and is essentially the equivalent of the client selling a call option on interest rates to the insurance company, where the more rates rise the greater the company wins at the expense of the client!

Given the unique structure of hybrid LTC policies, though, there are still several circumstances where they may be appropriate, despite the concerns about how they may perform in a rising rate environment. In some cases, simplified underwriting provides a way to get coverage for those who otherwise couldn't get any, and in other scenarios, the favorable tax treatment alone can make a hybrid policy compelling as a place to park an existing appreciated annuity. Nonetheless, the bottom line is that in today's environment, consumers must be careful not to engage into hybrid policies that amount to little more than offering the insurance company the unilateral right to profit if/when interest rates rise, when the reality is that simply following a "buy LTC insurance and invest the rest" philosophy would lead to a far better outcome in the long run.

Wednesday, October 16th, 2013 Posted by Michael Kitces in Insurance | 2 Comments

In just a few months, open enrollment begins for individual health insurance on the newly launching health insurance exchanges, and with it comes the onset of a new era in health insurance. While the general media focus has been on the penalties associated with the new individual insurance mandate, the reality from the planning perspective is that the new health insurance rules - including guaranteed access to coverage without any health underwriting - will drastically impact client financial planning decisions.

After all, separating health insurance from employment status by ensuring individual coverage is available directly from an exchange allows clients to be far more flexible with their job decisions. Deciding where to work will no longer need to be tied to the availability of health insurance, freeing clients to make job changes, start new businesses, or simply retire before age 65 Medicare eligibility, without worrying about how they'll get access to health insurance. How many clients would still be working where they are today if health insurance availability was guaranteed regardless of where (or whether) they worked?

On the other hand, the new health insurance rules will require new knowledge and skills for planners, as the health insurance exchanges will ensure access and availability to health insurance, but introduce complex rules regarding affordability. Helping clients understand how to pay for their newfound access to health insurance will require planners to learn how the new premium assistance tax credits work, and how to maximize them, along with helping clients to change their mindset about making job and career decisions separate from their health insurance coverage. In the long run, what results will likely be a more flexible and positive environment for clients to make good financial planning decisions... but the transition will require planners to get up to speed, and quickly!

Wednesday, June 12th, 2013 Posted by Michael Kitces in Insurance | 15 Comments

In 2014, employers will first become responsible for payments for “shared responsibility” for health care coverage, or what is increasingly being called the “Employer Shared Responsibility Tax” (ESRT), as a part of the PPACA legislation, under the new IRC Section 4980H. The ESRT is also known as the “play or pay” tax, as it effectively requires employers to either “play” by offering employee health care, or pay a tax for failing to do so. The ESRT will apply to so-called "large employers" with more than 50 full-time (equivalent) employees.

What's significant about the ESRT, though, is the fact that while it does represent a potential new tax to manage or avoid, the reality is that for many employers the penalty tax may be less expensive than sharing in the cost of employee health care... which means over time, employers may increasingly choose to just pay the penalty and let their employees get their own coverage. While in the past this wasn't feasible - simply because health insurance was often viewed as a "mandatory" employee benefit, especially for highly competitive job markets or positions - the reality is that employees (and non-employees) will be able to get guaranteed issue insurance for standard policy types and rates without any limitations on pre-existing conditions beginning in 2014. Which means, simply put, that employees will no longer need to rely on employers for health insurance, at the same time that employers may find its cheaper to just pay the penalty and stop offering coverage to employees.

In the meantime, though, the transition may be challenging for employers, which must make a decision by the end of the year whether to change their approach to health insurance in 2014, and make some significant decisions with big economic ramifications (not to mention simply ensuring they properly comply with the rules so they don't offer health insurance to employees AND pay a penalty!). Nonetheless, the onset of the ESRT may mark the beginning of the end of health insurance being tied to employment, where employers instead just pay employees a little more (or not), and let them make their own health insurance choices. And although this may be a difficult transition for employees as well, in the long run many individuals may actually enjoy the greater flexibility to change jobs, start businesses, or just retire early, in a world where employment is simply no longer a requirement to get access to health insurance.

Wednesday, May 29th, 2013 Posted by Michael Kitces in Insurance | 7 Comments

The fundamental purpose of insurance is to protect against and manage risks that can't otherwise be borne by an individual, from homeowner's insurance to protect against the risk of a disaster to the home, to permanent life insurance to protect against the financial impact of an untimely death. While term insurance can and does fulfill the latter function for most, in many cases clients currently maintain an existing permanent insurance policy, in anticipation of an insurance need that will last for the rest of his/her life. Often that need really does continue for life, but sometimes it does not.

In situations where permanent insurance is no longer needed - whether because the individual accumulated enough wealth than the death benefit protection is simply no longer necessary, or perhaps because the insurance was intended to provide liquidity for estate tax exposure that is simply no longer relevant at the newly permanent and portable inflation-adjusting $5.25M estate tax exemption - the default decision is often to cancel the coverage. After all, what's the point of paying for life insurance that's no longer needed?

The caveat, however, is that in today's low yield environment, many permanent life insurance policies indirectly provide another potential value: a remarkably favorable internal rate of return if simply held until death. Given this potentially appealing "bond alternative" many clients should not only keep an existing permanent policy - despite no need for the death benefit - but even consider making ongoing premiums, paying down loan balances, or even increasing contributions to maintain the policy in force for life! Of course, if the client really needs the cash value or cannot afford premiums, this strategy is not viable, but the policy can still be sold as a life settlement instead to harvest most of the underlying value.

The bottom line, though, is that given the internal rate of return on life insurance held until death, for those who don't need the policy - but don't need the cash value, either - the best decision for unnecessary life insurance might actually be to keep it, anyway!

Wednesday, April 17th, 2013 Posted by Michael Kitces in Insurance | 20 Comments

As the long-term care insurance industry continues its efforts to restore stability and regain profitability, the latest shoe is about to drop: a new gender-based pricing structure that will mean men and women pay different premiums based on their gender. The first company to venture down the path is the market leader Genworth, which is anticipated to begin receiving approvals to issue new policies with gender-distinct costs as soon as April; once the changes take effect, it's likely that most other major LTC insurance companies will follow suit as well, and the new cost structure may be an industry standard by the end of the year. The primary impact of the cost change will be women who apply for a policy as an individual; premiums are anticipated to be as much as 20% to 40% higher than for men when purchasing a comparable policy at a comparable age.

In the near term, this provides a unique opportunity for those considering a new LTC policy to buy one before the rate increase takes effect. Once the new pricing is in place, though, the only options may be to adjust the selected benefits to try to get premiums down to an affordable point, consider a hybrid LTC policy as an alternative (although such policies have challenges of their own!), or wait to see if the latest commission on LTC (required as a part of the fiscal cliff legislation) can come up with a new national solution to the country's LTC woes. The upshot of the new gender-based pricing changes is that it may ultimately make LTC premiums more stable; accurate pricing reduces the risk of future premium increases for in-force policies. On the other hand, this also means the pressure is on to buy coverage sooner rather than later, as the cost for new policies continues to rise even faster than the increases for existing ones!

Wednesday, February 20th, 2013 Posted by Michael Kitces in Insurance | 9 Comments

As the long-term care insurance industry continues to struggle in today's low interest rate environment, a growing number of clients who bought long-term care insurance in the past are getting notifications of premium increases - and often they're very significant increases, even from major companies like GenWorth, John Hancock, Prudential, and MetLife. While the LTC rate increase may be a shock, though, the reality is that in many cases the coverage is still cheaper than it would be to buy the policy anew in today's marketplace - which essentially means that even with the premium increase, continuing the LTC coverage can be a pretty good deal. Nonetheless, in some situations the premium increase makes the insurance unaffordable, which forces them to decide how to modify and reduce the coverage to maintain the original premiums. When such reductions are necessary, most clients should choose to reduce the benefit period, and older clients may reduce the rate on the inflation rider as well; most clients will probably want to avoid reducing the daily benefit amount. The good news, at least, is that given how much more expensive LTC insurance is in the current marketplace, it's drastically less likely there will be premium increases on today's new policies. Nonetheless, it's still necessary to properly deal with and navigate the rate increases that are occurring on coverage purchased years ago.

Wednesday, December 5th, 2012 Posted by Michael Kitces in Insurance | 8 Comments

As QE3 and low interest rates persist into the indefinite foreseeable future, the weak return environment may be claiming another casualty: no-lapse or "secondary guarantee" universal life policies. Although many insurance companies have already been raising premiums on new no-lapse UL policies for several years now, or ceased offering such coverage entirely as interest rates have fallen, the process of change is being accelerated by the NAIC's new Actuarial Guideline 38 (AG 38, also known as Regulation XXX), which will require insurers to hold greater reserves on both new and some existing no-lapse UL policies. The consequence of AG 38: new secondary guarantee UL policies will become more expensive, and although existing policies cannot retroactively have their premiums altered, their cash value may perform even worse than originally projected and be even slower to respond with increases in the crediting rate whenever interest rates finally do rise. Although AG 38 is not anticipated to cause the total demise of no-lapse UL policies, the time window is short to obtain coverage before all the premium increases are finalized. And heading into 2013 and beyond, the choices for policies (and carriers offering them) will continue to be fewer, the premiums may continue to rise on subsequent new policies, and some insurance companies may experience earnings hits or outright ratings downgrades - at least until interest rates finally return to more "normal" levels again!

Wednesday, November 21st, 2012 Posted by Michael Kitces in Insurance | 0 Comments

As the long-term care insurance industry continues to suffer - a challenge that won't likely end soon, given ongoing increases in health care costs and continued low interest rates that may it difficult for the insurer to generate a return on premium investments - planners and clients have both become increasingly skeptical about long-term care insurance. At best, prospective policyowners feel compelled to buy far less coverage than they can afford, just to leave room in case premiums rise in the future, given the quantity of ugly premium increases on existing policies that have occurred in recent years. Yet the reality is that while many industry trends, from low lapse rates to low interest rates to claims patterns were a surprise relative to what insurance companies expected 10-15 years ago, they are known facts today. Accordingly, even the base cost for a new long-term care insurance policy has risen dramatically over the past decade. However, higher pricing - adjusted for the realities of today's marketplace - actually means that while the pace and severity of premium increases on old policies has risen, the risk of premium increases on new policies purchased today may actually be declining! Are planners and their clients becoming most concerned about long-term care insurance premiums at the time they are actually least likely to occur!?

Wednesday, October 24th, 2012 Posted by Michael Kitces in Insurance | 18 Comments

The long-term care insurance marketplace has struggled tremendously over the past decade, as premiums have risen on both existing and new policies, and companies have become increasingly more stringent in their underwriting process. Over the past two years, however, the pace of change has accelerated, as major players like Prudential and MetLife have stopped offering long-term care insurance entirely. And with the low interest rate environment continuing to persist, a new round of changes is underway, with industry leader Genworth announcing the elimination of both so-called "limited pay" options (10-pay and pay-to-65 policies), and also declaring that it will no longer offer unlimited (i.e., "lifetime") benefits on policies anymore. In point of fact, while Genworth has not been the first or only company to make these changes, it's notable when even the top carrier feels the need to cut back on its exposure to long-term care insurance policies. Ultimately, this is probably not the beginning of the end for long-term care insurance, but it's also not clear if or when clients in the future will ever be able to get policies as "generous" as those offered in the past.

Tuesday, July 17th, 2012 Posted by Michael Kitces in Insurance | 13 Comments

Life insurance policies - permanent ones in particular - have long been difficult to accurately evaluate, due to the relative opacity of actual pricing representations comingled with performance assumptions in policy projections. To address this challenge, a company called Veralytic has developed a tool to "x-ray" through a life insurance policy illustration, evaluating and benchmarking the underlying policy expenses and their viability. In the near term, Veralytic's analytical tools may provide a way for financial planners to finally conduct effective due diligence on client proposed and existing life insurance policies. In the longer run, though, the transparency and benchmarking that Veralytic is bringing to the life insurance industry has a chance to truly reform the industry, making it clear which products and companies are truly competitive and which are not. But Veralytic cannot reach a tipping point without getting more users on board; accordingly, they've offered readers of this blog a special deal to take a test drive!

Thursday, May 10th, 2012 Posted by Michael Kitces in Insurance | 11 Comments

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