Rising Interest Rates Give Hope To Battered LTC Industry
December 30, 2015 by Juliette Fairley
When Shirley Luu secures long-term-care coverage for her clients, she prefers using fixed-indexed annuities with an LTC rider rather than through a traditional insurance policy.
“There are clients who feel paying for a stand-alone long-term-care insurance policy could be a waste of money if they never use it,” Luu told Financial Advisor. “With a fixed-indexed annuity, the long-term-care rider is an option along with a lifetime stream-of-income rider.”
Over the past two years, Luu said her financial advisory practice has enrolled some 200 clients in a fixed-indexed annuity with the option of a long-term-care rider. Companies that offer these products include American Equity and North American.
“Linked-benefit products are helpful for clients that have pre-existing conditions that disqualify them for traditional long-term-care insurance policies,” Luu said.
According to the American Association for Long Term Care Insurance (AALTCI), 2014 was the first year that more consumers purchased a linked-benefit product as opposed to a traditional, long-term-care insurance policy.
But now that long-term interest rates are on the rise, advisors like Luu may be shifting their focus back to traditional policies.
“Advisors have been taking a singular approach, focusing on linked-benefit products because they are easy and don’t come with the negative perceptions of traditional long-term-care policies, but they should be aware that interest rates and long-term-care policies are connected,” said Jesse Slome, director of the AALTCI.
The Federal Reserve raised its key interest rate for the first time in nearly a decade in December, from a range of zero to 0.25 percent to a range of 0.25 percent to 0.5 percent.
Because insurers primarily invest specifically in bonds or fixed-income securities and not equities, higher interest rates are good news for insurers.
“It will mean additional revenue for long-term-care insurers that will relieve the financial stress they have been facing, free them up to grow the long-term-care market and give them breathing room to provide some rate stability to their customers,” Slome said.
A 1 percent increase in long-term interest rates can mean a 10% to 15% decline in policy premiums or costs, according to the AALTCI.
“Part of the reason monthly premiums have increased over the past few years is because interest rates have been declining,” Slome said.
The last time the Federal Reserve raised interest rates was 2006. The extended low interest rate environment has forced several long-term-care insurers to exit the business. “It’s difficult for insurers to earn a desired return on business when interest rates are so low,” Slome said.
Although a growing number of baby boomers are expected to need long-term care as they age, Aetna, Humana, Nationwide Financial and Prudential have withdrawn from the LTC business. But this trend may shift as interest rates rise.
“It will become increasingly attractive for insurers to re-enter the long-term-care insurance market, and when they do, expect them to introduce new policies that are less expensive, which will drive accelerated change,” said Slome.
The number of people age 65 and older who are expected to develop Alzheimer’s disease adds to the problem.
According to the Alzheimer’s Association, by 2025, some 7.1 million people will have the illness, which is a 40 percent increase from the 5.1 million aged 65 and older that were affected in 2015.
“We have a growing aging population that will need long-term care and clearly no government plans for dealing with the need or cost for care,” Slome said.