The road to retirement just got rockier

Advisers have a vital role in helping long-term care insurance holders decide whether the policies are worth the cost and affordable

Apr 3, 2016 @ 12:01 am

Insurance companies finally are accepting that interest rates are not likely to increase substantially in the foreseeable future and are pushing up the costs of some key forms of insurance — long-term care coverage in particular — which will cause problems for many retirees and those nearing retirement.

They will have to make decisions about what to do about LTC policies — whether to keep them if they have them, or keep them but reduce the benefits to keep the rising costs down, or whether or not to buy them if they don't have them. Financial advisers can help them make those difficult decisions.

The insurers rely on the interest they earn on the premiums customers pay on their policies to ultimately pay the promised benefits and make a profit, but that has become increasingly difficult in the past seven years as the Federal Reserve engineered low rates to try to stimulate the economy.

This has particularly affected long-term care and universal life policies.


With LTC policies, insurance companies expected to have a significant number of years to accumulate reserves against the costs of long-term care by investing the premiums at interest rates sufficient to provide a margin for profit. But the historically low rates over such a long period have made that almost impossible.

As a result, many insurance companies have stopped selling long-term care insurance. Others have increased premiums not only for new policies but also for existing policies, or have reduced benefits.

One John Hancock Insurance long-term care policyholder, who bought the coverage in 2002 when he was 59, had his annual premium increased by 77% in 2015 to $3,061, from $1,729 in 2014. He was given the choice of avoiding the premium increase by reducing the future annual inflation rate on the policy benefits from 5% simple to 3.4% simple.

Alternatively, he could cut the rate increase in half by reducing the inflation rate to 4.1% simple. His wife's policy was increased by a similar percentage so that their LTC coverage now costs more than $6,000 a year.

However, the policy would pay a long-term care benefit of more than $83,000 a year after a six-month waiting period, so the couple decided to continue the policy, though it was not an easy decision. It is likely that this was not the last premium increase for the policies, especially if the Federal Reserve delays any expected rate increases or slows the pace of such increases.

Many long-term policy holders will continue to face the question of whether the policies are worth the cost and are affordable, and financial advisers have a vital role in these decisions.

Already many people have decided that long-term care policies are now costly luxuries they can do without. Sales of such policies fell to 131,000 in 2014 from more than 350,000 in 2004.

The decision is not a simple one. It depends first of all on an individual's financial situation. Can he or she afford a long-term care policy that costs more than $3,000 a year, the cost of which might go up when the individual is living on retirement income?


Second, is the individual's health, and family health history, such that he or she might spend a significant period needing nursing home or home health care? Does the individual's financial situation make it likely he or she could afford such care without a long-term care policy?

The issue has become more complicated in light of new research by Boston College's Center for Retirement Research showing that while the lifetime risk of needing nursing home care was 27% for men 65 or older and 44% for women the same age, the average nursing-home stay was only 10 months for men and 16 months for women.

In addition, the research found that half of all men's nursing home stays, and 36% of women's, lasted less than three months. Medicare will pay for up to 100 days of nursing home care following hospitalizations.

This makes for a complicated decision that should not be based on “gut feel,” but on rigorous analysis.

Many other individuals are being hit by low interest rates through universal-life policies. They had hoped the buildup inside the policies during their working years would pay the premiums when they retired. But the low interest credited to the policies by insurance companies in recent years means the inside buildup has not been enough to pay the premiums, leaving them to pay out of their retirement income.

Advisers should be able to guide clients who are affected through both of these costly problems.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


When can advisers expect an SEC fiduciary rule proposal and other regs this year?

Managing editor Christina Nelson and senior reporter Mark Schoeff Jr. discuss regulations of consequence to financial advisers in 2018, and their likely timing.

Recommended Video

Path to growth

Latest news & opinion

Fidelity charging new fee on Vanguard assets held in 401(k) plans

The 0.05% fee is ostensibly a response to Vanguard's distribution model, but may also make the company's funds less attractive due to higher cost.

UBS adviser count continues to decline

Firm to merge U.S., global wealth management units on Feb. 1

TD Ameritrade launches all-night trading for ETFs

Twelve funds now can be traded after-hours, but the list will grow, company says.

Cutting through the red tape of adviser regulation is tricky

Don't expect a simple rollback of rules under the Trump administration in 2018 — instead, regulators are on pace to bolster financial adviser oversight.

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print