The Advisor's View of Long-Term Care Planning

Three ways higher interest rates help long-term care insurance

Posted by Tom Riekse Jr | Dec 18, 2015 2:00:32 PM

Higher interest rates help the long-term care insurance industry

You can't miss the news - the federal reserve raised their benchmark fund rate by a quarter point.  For the insurance industry it is good news and will assist life, annuity, and long-term care insurance carriers. 

For LTC carriers, there are three big reasons why slowly rising interest rates are good news:

  1. It helps the profitability of current LTC carriers. No one feels sorry for insurance companies, but the 2008 financial crisis and subsequent low interest rate environment (LIRE) have negatively impacted insurers.  Specifically, when current LTC carriers ask for premium increases on in-force business, they can use  justifications such as adverse experience on morbidity (health underwriting), lapse rates (overestimating) and morbidity.  However, typically companies cannot use low interest rates as a reason for increases. Because of that, the only way for companies to become profitable is to earn more money on their reserves - and higher long-term interest rates will go a long way to help.  More profitable LTC business lines will lead to reinvestment in the product line.

  2. It will attract new entrants into the field.  Over the last 10 years some big brand name long-term care insurance carriers such as MetLife and Prudential have left the LTC business. Now, at least one (and possibly more) carriers will enter the LTC market.  Why? The current pricing assumptions are very conservative so it's really attractive for new carriers to come into the marketplace.  If interest rates go up, they can enjoy the surplus profit. Companies such as National Guardian life are jumping into the LTC market with their Essential LTC product.  

  3. It will lower premiums on new products. A major barrier to long-term care production has been the fact that new products are more expensive. Although being smart about pricing recommendations can help, it is also estimated that a one percentage point rise in long-term interest rates generally translates into a decline in policy premiums of about 10 percent, according to Al Schmitz, a principal and consulting actuary at Milliman, a consulting firm that works with insurers.

Long-term care insurance is an easy purchase to delay. If new products are coming out and rates are going up, why not just delay the purchase of coverage? The reason is similar to what it has always been - health can change and the younger you buy the lower the premiums. Or, you can check out John Hancock's new Performance LTC plan - which will actually credit the policy in a rising interest rate environment. 

2015 LTC Review and 2016 Outlook


Topics: For financial professionals, Current affairs

Written by Tom Riekse Jr

Tom Riekse, ChFC, CLU, CEBS is the Managing Director of LTCI Partners, one of the largest national distributors focused on long term-care planning. LTCI Partners works with financial advisors, benefit brokers, associations and anyone else interested in helping protect people against the devastating financial impact of a long-term care event.

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