Kitces | Nerd's Eye View - Insurance

Why Cancelling An Existing Whole Life Or Universal Life Policy May Be A Bad Idea

nospam@example.com (Michael Kitces) — Wed, 17 Apr 2013 06:05:00 -0500

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!

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Gender-Based Pricing Coming Soon To Long-Term Care (LTC) Insurance

nospam@example.com (Michael Kitces) — Wed, 20 Feb 2013 06:02:00 -0600

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!

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How To Handle A Long-Term Care Insurance Rate Increase

nospam@example.com (Michael Kitces) — Wed, 05 Dec 2012 06:03:00 -0600

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.
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Actuarial Guideline 38 Puts Even More Pressure On No-Lapse Guarantee Universal Life

nospam@example.com (Michael Kitces) — Wed, 21 Nov 2012 06:03:00 -0600

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!
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Is The Risk Of LTC Insurance Premium Increases Rising... Or Falling?

nospam@example.com (Michael Kitces) — Wed, 24 Oct 2012 06:08:00 -0500

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!?

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Yet More Big Changes Underway In The Long-Term Care Insurance Marketplace

nospam@example.com (Michael Kitces) — Tue, 17 Jul 2012 06:07:00 -0500

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.
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Will Veralytic Reform The Life Insurance Industry?

nospam@example.com (Michael Kitces) — Thu, 10 May 2012 06:06:00 -0500

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!
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A New Way To Pay For Long-Term Care Insurance With Favorable Tax Treatment

nospam@example.com (Michael Kitces) — Tue, 08 May 2012 06:05:00 -0500

While the tax code does allow for the tax deductibility of long-term care insurance premiums, the treatment is very limited. Only premiums up to prescribed IRS limits are allowed, and the premiums (in addition to other medical expenses) must exceed the 7.5%-of-AGI threshold to be deductible at all. However, new rules under the Pension Protection Act of 2006 - delayed to only take effect beginning in 2010 - provided a new means for tax-favored LTC payments: by completing a 1035 exchange from an existing life or annuity policy into a long-term care policy. While the 1035 exchange merely defers the gains associated with the life or annuity policy, the tax-free nature of LTC benefits effectively ensures that the taxable gain disappears entirely. As a result, clients with an existing life or annuity policy with a gain may wish to complete a 1035 exchange - or more commonly, a partial 1035 exchange each year as the LTC insurance premium is due - to gain more preferable tax treatment for funding their LTC coverage.
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Short-Fat versus Long-Thin Policies - What's The Best Choice For Long-Term Care Insurance?

nospam@example.com (Michael Kitces) — Thu, 19 Apr 2012 06:00:00 -0500

Long-term care can be extremely expensive for many clients, with costs that are potentially catastrophic to their financial well being. Accordingly, planners commonly recommend long-term care insurance to help manage the risk. Yet as long-term care insurance costs continue to rise, the insurance itself becomes increasingly difficult to afford, forcing clients to make trade-off decisions about which policy options to select, such as whether to buy a long-thin policy (long benefit duration with small daily benefits) or a short-fat policy (short benefit duration with larger daily benefits). Historically, clients who could afford to do so have leaned in the direction of long-thin policies with lifetime benefits, to address the ever-present fear of an extremely long duration health care event, even though the reality is that most claims only last a few years. More recently, though, the direction has shifted, due to everything from the rise of state partnership programs to the increasingly expensive cost of lifetime benefits. Are short-fat policies now the way to go for long-term care?

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Just How Much Do You Assume Mass Affluent Clients Will Pay For Retirement Medical Expenses?

nospam@example.com (Michael Kitces) — Mon, 02 May 2011 08:30:22 -0500

With the cost of health care just continuing to spiral higher and higher as the years go by, it becomes increasingly difficult to advise clients about how much to save to handle those future costs in retirement. On the one hand, it's crucial not to undersave, such that ongoing health care costs devastate and deplete the retirement portfolio; on the other hand, excess conservatism can be bad too, forcing clients to unnecessarily constrain their lifestyle with more saving than is necessary, or working longer and retiring later than was actually needed. So just how much do you assume your mass affluent clients will pay in projected future health care costs during retirement?
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Big Shifts Continue in the Long-Term Care Insurance Marketplace

nospam@example.com (Michael Kitces) — Sat, 13 Nov 2010 08:51:52 -0600

Citing an array of classic problems - including interest rates, morbidity, mortality, and persistency - long-term care and general insurance behemoth MetLife announced this week that it will be leaving the long-term care marketplace completely. And coming on the heels of recent announcements last month by GenWorth and John Hancock of significant premium increases on large blocks of their policies, it would seem that the long-term care insurance marketplace is in a bit of turmoil. Does this mean the industry is in trouble, or is this actually a sign of stabilization?

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Things are Heating Up with the Next Generation... of No-Load Life Insurance!

nospam@example.com (Michael Kitces) — Thu, 26 Jun 2008 14:50:30 -0500

For many years, the no-load space for life insurance products has been very limited, to a large extent because fee-based advisors were perceived as being a very weak target market by the traditional insurance companies. However, a new entrant to this marketplace is raising the stakes on the pricing and transparency of permanent life insurance, and is starting to get some attention as a result!

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Is your excess insurance capacity for sale? Should it be?

nospam@example.com (Michael Kitces) — Fri, 28 Mar 2008 15:06:59 -0500

The pitch goes something like this: "You are eligible for more insurance than you currently have, giving you "excess capacity" for insurance on your life. Why don't you sell that capacity, since you're not using it anyway, and put the extra money in your pocket to meet your own goals?" And if it wasn't against public policy, the strategy might even work!
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