Reading Tea Leaves: Long-Term Care Insurance (LTCI)

Congress has let us down: When interest rates eventually rise, the interest on the $28 trillion of US debt will also increase. Medicare will run out of funds in 2026; and Social Security is projected to do the same in 2034. As more funds are allocated to debt service and entitlements, fewer funds remain for discretionary spending.

How does this impact LTCI and how should employers and individuals respond?

As Congress refuses to enact sensible but necessary reforms, the resulting pressure for higher taxes and the reality of lower-quality government benefits (e.g., rationing) make it less likely that Biogen’s Aduhelm, an expensive Alzheimer’s therapy (and other similar drugs in the future) will be covered by Medicare or private health insurers. Private health?insurers already pay higher prices than what Medicare reimburses for comparable services, and that gap is growing.?

Several insurers have recently sold those parts of their life and annuity businesses that have struggled during this historically long and persistently low interest rate environment. Insurers, like their retired insureds, require that the interest rates on their bond portfolios be closer to 5% rather than 1% so that their operations are profitable.?

And for the remaining life insurers it will be extremely challenging to manage their bond portfolios as interest rates climb.

MetLife exited the LTC arena in 2017, as its troubled block of business was assumed by Brighthouse Financial (Metlife owns about 20% of its stock but Brighthouse is an independent company).?Brighthouse replaced Metlife’s flawed standalone LTCI policies with a new innovative Hybrid product. First, the good news:?

o???A Cash Indemnity style benefit is paid instead of Reimbursements, so the insured is more likely to receive the maximum monthly benefit rather than being delayed or limited by having to submit bills and receipts.?

Also, informal care is permitted—one insurer reports that 43% of all claims are paid this way—meaning that you have the flexibility to pay a family member or friend. Insurers who pay benefits via Reimbursements only cover professional caregiving agencies.

o???A broad international benefit—most LTC insurers have severe payment restrictions for those who retire outside the US

But for insurance brokers, CEOs, financial advisors, HR Directors, and individuals, three risks should be considered:

o???The Comdex score in 2021 for Brighthouse Financial is 79. Until it strengthens its balance sheet, so it can join its Hybrid competitors at 90+, too much risk is being taken on a contract that might not be triggered for several decades.

o???Having no options beyond spreading payments over 5 years presents the problem of paying for a policy during a severe stock market correction. For example, despite being rewarded with a larger asset pool with a 1-Pay (since the insurer receives your funds sooner), a 10-Pay will better protect your investment portfolio in the long term—say, a market recovery over the next 30 years earning 5% annually:

·??????A single premium removes too much from a down account

·??????A 10-Pay premium schedule leaves more in the account to recover from

o???Instead of offering 3% compound or 5% compound guaranteed inflation protection, Brighthouse provides an indexed stock fund protected by options, so that the asset pool values can never lose money in any given year. But there is a tradeoff: your upside is limited in years that the stock market has double-digit gains.

Where is the risk as long as the stock options are properly priced??

o???According to the Shiller PE Ratio?https://www.multpl.com/shiller-pe?the stock market in 2021 is far above what is considered fair value—a PE Ratio of about 16. This questions the wisdom of doubling down on the stock market now, especially with the possibility of increasing interest rates, where we may see a considerable transfer from stocks to bonds.

o???In designing an investment portfolio, the Hybrid LTCI asset pool should be seen not only as erasing a substantial financial risk (e.g., $300,000 saved for retirement that does not have to be spent on LTC) but also as an efficient portfolio diversification strategy.

When a Hybrid Life + LTCI policy has a 3% or 5% compound inflation rider, it becomes a?conservative non-correlated asset: While stock market volatility can drive the value of one’s assets down, in contrast the Hybrid is an insurance contract guaranteed by the financial strength of the insurer.