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!?
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.Read More…
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!Read More…
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. (Now 10% of AGI for those under age 65, and 10% of AGI for those age 65 or older after 2016!)
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.Read More…
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?
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?Read More…
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?
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!
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!Read More…