The Advisor's View of Long-Term Care Planning

What is the implication of rising interest rates on traditional and linked LTC programs?

Posted by LTCI Partners | Oct 18, 2013 3:52:00 PM

Although predicting future interest rates is an inexact science, many trends point towards a gradual rise in longer term interest rates for a variety of reasons, including an improving economy.

What's the implication for LTC programs, including traditional, annuity/LTC and life/LTC programs?  Here is a prediction:

For traditional plans, it should result in more premium stability as a primary reason for premium increases has been lower than anticipated returns on the carriers reserves.  A quick rule of thumb industry experts use is that missing interest rate assumptions by 1% on an LTC product means carriers have to raise in-force premiums premiums 20%! As an example, LTC plans that priced products for a 5% interest rate return and only get 3% average return, need about a 40% rate increase on those policies.   Each year the carrier doesn't get the rate increase means the potential for even more rate increases later.

Newer LTC products, which are priced more conservatively, assume a lower interest rate return (which also make the initial premium higher). To help entice new policy buyers, some carriers like John Hancock offer features that increase benefits in a rising interest rate environment by sharing the investment returns over 3%.

What about Annuity/LTC plans? Because of low interest rates, several carriers have shelved or not introduced plans.  It's very hard to pay LTC premiums out of policy values that are increasing at such a low rate.   With rising rates, however, expect these plans to be introduced again.  The annuity/LTC plans (those that have tax-qualified LTC benefits, require producer training, and are health underwritten) allow  policyholders to get benefits out of a non-qualified annuity on a tax-qualified basis - a unique benefit.

What about Life/LTC plans?  They have been very popular in a low interest environment because they have offer a guaranteed LTC rider premium, return of premium features and some increase in benefit value.  However, when interest rates rise the carrier holds the power on whether to increase the crediting interest rate. If the policyholder wants to put their money to work at a higher interest rate, they then lose the LTC benefit.  As Michael Kitces writes in his excellent article (link below), "clients should be cautious not to run away from traditional LTC policies and towards potentially-low-return hybrid policies at the exact moment that traditional LTC premium increases are slowing and interest rates are near the bottom of a long-term cycle!"

The complete article makes for a good read :

Topics: For financial professionals, Advice articles about planning

Written by LTCI Partners

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