Category Archives: Insurance

Information to help you protect your assets from your risks

Personal finance trends – the good and bad

Posted on May 3, 2013 | Leave a comment

Positive developments in 2013

1)      Lower expense ratios on many Exchange Traded Funds (ETFs). Last year, Schwab started the trend of lowering ongoing management fees on their ETFs and eliminating the transaction costs to buy and sell these products on the Schwab platform. This move attracted the attention of competitors and now many ETFs are cheaper to own than ever before. These products allow the broadest diversification across entire market segments at the lowest possible cost.

2)      The government has increased the contribution limits for retirement accounts for the first time since 2008. Annual IRA contributions were bumped up by $500 to $5,500 for people 49 and under and $6,500 for 50 and over investors. Employer retirement plan contributions also increased. Individuals under 50 can contribute $17,500. The over-50 catch up contribution can add another $5,500 to get to $23,000 total.

3)      Congress adopted higher federal estate tax thresholds ($5.25 million per person and $10.5 million per couple in 2013) than expected by most pundits. This effectively eliminates the prospect of paying federal estate tax for 99.86% of estates according to the Tax Policy Center. It also provided much more clarity for estate planning professionals who work with high net worth individuals on estate planning issues. Many states still have lower estate tax thresholds, however. For example, in Washington state the limit is $2 million. If a person dies with an estate value of $1,999,999 no state estate tax is due. But reach $2,000,001 and an estate tax return and payment are necessary.

4)      Investors have returned to markets. According to Leuthold Group, through April 24, net cash flow into mutual funds was at its strongest pace ever with year-to-date positive cash flow $223 billion.

Trends that concern us:

1)      Regarding that cash flow, the point of concern is that $106 billion of the incoming investments have gone to bond mutual funds. We think bonds will be severely challenged to generate meaningful returns over the next several years. Combine the premium many bonds are trading at with current low yields and the fact that total return could turn negative when interest rates rise and particularly U.S. government bonds will struggle to post returns anything like the past decade. By comparison, $22 billion of new investments have entered U.S. stock funds so far this year.

2)      The low interest rate policy set by the Federal Reserve Board. This policy has lowered the borrowing costs for the U.S. Government, but it has also changed the way that we all invest. Bond investors who are searching for yield are taking considerably more investment risk with their fixed income portfolios than ever before. When the Fed finally increases interest rates, three things may happen: inflation could increase dramatically, bond default rates may rise, and returns for bonds could turn negative as investors seek newer bonds at different increasing interest rates.

3)      Less affordable long-term care insurance. A few trends are becoming clearer for the LTC marketplace. A) most residents of nursing homes are women, b) Most baby boomers don’t have long-term care insurance because they either feel that it is too expensive or they don’t think that they will ever need it, C) Rates paid for LTC policies are becoming gender based, and although they have stabilized somewhat in the past year, the combination of the continuation of the low interest rate policies by the federal government and higher claims rates by women will force LTC prices to continue to grow at higher rates than inflation.

~ Allyn Hughes, CFP® — Brooks, Hughes & Jones – Partners in Wealth Management, Tacoma, WA

www.BHJadvisors.com

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Pending insurance policy price changes create urgency (in some situations) to act now

Posted on November 29, 2012 | Leave a comment

Insurance actuaries have a difficult job. They must combine a number of factors—information about purchasers, economic health, product attributes and competitive pricing – to price policies so they are attractive for purchasers and generate profit for the insurance company.

Recent history suggests that many actuaries underestimated two important factors – persistently low interest rates and increased longevity – when they priced Universal Life insurance and Long Term Care insurance for women. This is leading to changes in pricing.

Universal Life Changes

In a recent blog post, author Michael Kitces reviewed some changes in Universal Life Insurance that have occurred as a result of low interest rates and new government actuarial guidelines. “The National Association of Insurance Commissioners has created new reserve requirements for universal life policies that offer so-called “secondary guarantees” (also called “no lapse guarantees”) — which guarantee that the policy will remain in force, for life or a specified period of time, as long as any required ongoing premiums are paid, even if the cash value turns out to be insufficient to maintain the policy.” These new reserve requirements are being implemented over the next few weeks.

Because interest rates have been so low for so long, most universal life policy issuers have either stopped writing new policies, or have (or soon will) increased their pricing on new policies that they issue. These price increases could be in effect early next year. Some of these insurance carriers are even lowering the annual interest credit that they pay on existing policies to very low levels.

Not all universal life companies have completed the process of raising their prices on new policies. If you need a permanent policy with a “no lapse guarantee” then it would be worth a call to an insurance agent to see if you could purchase a policy before these new reserve requirements are implemented.

Long Term Care Policies for Single Women

According to an AARP Public Policy Institute Fact Sheet on Long Term Care (LTC) insurance, 64% of the LTC benefits paid out in 2010 went to women.  Single women with health conditions represent the group with the highest incidence of LTC usage.

To begin to better reflect this reality, the largest LTC provider, Genworth Financial, is changing the way that it prices its LTC policies. In the past, Genworth used a unisex rating table to price LTC for new customers. Starting in January, they will make a variety of changes to their LTC offerings to make them more profitable. Among these are:

  • Charge different annual premiums for women and men.
  • Introduce new blood tests that are currently used for life insurance underwriting for new policy holders.
  • Use lower investment return assumptions for policy premiums to more realistically reflect today’s interest rate environment.

These changes may end up being copied by other LTC carriers, so if you are a single woman it may make sense to buy a policy as soon as possible.

~ Allyn Hughes, CFP®, CLU®, ChFC® – Brooks, Hughes & Jones – Partners in Wealth Management – Tacoma, WA

www.BHJadvisors.com

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Long-term care insurance cost may actually stop rising

Posted on November 2, 2012 | Leave a comment

Nearly 10,000 Baby Boomers retire each day and one of their prominent decisions about financial security is how can they protect against the risk of needing expensive long-term health care. The long-term care (LTC) insurance industry is changing so rapidly that people considering policies this year have different considerations about premiums and coverage than people who purchased policies last year.

Over the past few years, the LTC marketplace has had to withstand a series of challenges. The underwriters for the major LTC providers made some large miscalculations when they originally priced their policies.

  • They counted on the fact that at least 5% of LTC policy holders would decide not to continue to pay the premium and would let their policies lapse. In most cases these lapse rates have been closer to 1% than to 5%.
  • They assumed that the interest rates paid on bonds would be considerably higher than they presently are. It is very difficult for an LTC insurance carrier to provide a guaranteed 5% compound rate of inflation for a LTC insurance policy holder when they can’t earn that return in the bond markets.
  • They also assumed that a lower percentage of people who actually bought LTC insurance would need to use their policy to make claims.

These incorrect assumptions have led to some bad outcomes:

  • Prudential Insurance Company quit writing new LTC policies in March of this year. It joined Metropolitan Life, TIAA-CREF and Unum in exiting this business line.
  • Rates have risen for existing policy holders at levels that most LTC buyers never thought possible. John Hancock raised rates for one group of its LTC policy holders in Illinois by 90%!

Even with these huge increases, the costs for keeping existing LTC policies are LESS than the cost for ending the policy and buying a new one based on your current age.

In a recent post, financial planner and blogger Michael Kitces reviewed these changes as well as the outlook for the LTC market. His conclusion is that the days of these huge increases in annual LTC premiums are numbered because the underwriters for the LTC insurance providers who are still around have planned for the worst when they have re-priced their policies. This has made the current pricing for these policies “more appropriate” according to Kitces. He also suggests that policies that are issued today will have a history of rate increases that “is likely to be less severe” than policies issued in the past.

If this is true, then maybe the surprises for all concerned, the LTC carriers, current policy holders, and new LTC policy buyers will be reduced. This will be a situation that is good for all.

What is your position on long-term care insurance vs. self insuring the risk?

How much has your LTC insurance premium risen over time?

~ Allyn Hughes, CFP®, ChFC®, CLU® — Brooks, Hughes & Jones — Partners in Wealth Management – Tacoma, WA

www.BHJadvisors.com

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Examine hybrid life / long-term care policy before prices climb in 2013

Posted on October 3, 2012 | Leave a comment

An article in the September 29th edition of The Wall Street Journal “Does Long-Term Care Mix with Life Insurance?” by Kelly Greene pointed out some changes that are occurring in the hybrid life/long-term care insurance market that could save you money if you move quickly.

A hybrid life insurance policy is a relatively new product that combines a permanent life insurance policy with a long-term care insurance policy. This type of policy is more expensive – 20% or more – than a regular permanent life insurance policy. It provides the insured with long-term care benefits equal to the life insurance death benefit and offers a variety of advantages over a traditional long-term care (LTC) insurance policy by itself:

  • “Fixed” premiums. The premiums for long-term care insurance policies have increased over the past few years. Higher than expected claims experience and low returns on their fixed income investments have forced LTC insurance carriers to either increase their rates or exit the business (an alternative that some prominent carriers have chosen). Once you buy a hybrid insurance policy, the annual (or monthly) premium for the policy will never go up, so your LTC costs are locked in.
  • Flexibility. With a hybrid policy you are buying permanent life     insurance. If you don’t need the long-term care portion of the policy, then your beneficiary will receive the proceeds from the life insurance policy (tax-free) when you die. If you need the LTC, then it is available to you. Either way, the money paid into this policy is received by the policy holder or his/her beneficiary.
  • Estate planning advantages. If the “indemnity” benefit rider is chosen for a hybrid policy, then the policy can be owned by an irrevocable trust. Trust ownership allows the owner to use the long-term care benefits while he or she is living up to the level of the accelerated death benefit. Then, when the insured dies, the proceeds from the balance of the life policy are paid to the heirs, and these proceeds are not included in the estate of the insured. This saves on estate taxes.

There are some downsides of hybrid policies, though. First, they tend to have different definitions of disabled than are used by long-term care insurers. Long-term care insurers require that the insured cannot do “two activities of daily living” or have a cognitive issue that makes it impossible for the insured to take care of him or herself. The hybrid insurance policies can have more stringent definitions of “disabled.”

According to the WSJ article, on September 12, the National Association of Insurance Commissioners revised an “actuarial guideline” for these hybrid policies, which will force insurers to increase their rates for these policies by 5-25% (depending on the insurer) as of January 1, 2013.

If you are in the market for both life insurance and long-term care insurance, you might want to determine if a hybrid policy is aligned with your goals of risk protection and, potentially, tax-free asset transfer to your heirs. Getting your application submitted before year end could save a meaningful amount of money on the annual premium.

~ Allyn Hughes, CFP®, CLU®, ChFC® — Brooks, Hughes &Jones, Partners in Wealth Management, Tacoma, WA

www.BHJadvisors.com

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Can you afford to self insure against the risk of needing long-term care?

Posted on August 21, 2012 | Leave a comment

For many people, their financial security in retirement could hinge on a potentially expensive need for long-term care.

The decision of whether or not to protect against this risk through the purchase of long-term care insurance is a very important consideration for most people in their late 50s and early 60s.

Some affluent people can clearly self insure this risk, setting aside savings or investments to cover potential future costs. But there are many people who are squarely in between a clear ability to self-insure and a clear need to purchase insurance.

If you are deciding whether or not you can afford to self insure against the potential need for long-term care, there is a calculator that does a nice job of estimating the potential expense that you could face and how much you would need to save to overcome that expense.

The calculator available here starts with default entry points but you can change them to reflect your situation and other assumptions.

For instance, you’ll see a default annual cost of long-term care of $50,000. This figure may be applicable to in-home care and assisted living but more comprehensive nursing home care costs $80,000+ on average in Washington state. Another variable to change is inflation of long-term care costs. General cost of living may rise about 3% per year but health care costs increase faster. It’s better to enter 5% inflation if you are below age 70. If you are much above age 75, then a 3% inflation level should suffice. The length of long-term care need is a significant wild card in this equation. The average nursing home stay is 2.4 years and the average person entering a nursing home is 79 years old. Of course, you probably have a relative or acquaintance who spent many more years in a facility, particularly if memory care was needed.

Given a certain set of assumptions, let’s look at how much you would need to save to self insure a future need for long-term care.

This scenario produced the following outcome:

“Your future long-term care needs total $324,139. You have available assets of $10,000. To self-insure you will need to save $10,505 per year increasing at 0.0%, or, you can set aside a lump sum of $122,356 today and let it accumulate interest until needed. Alternatively, you could consider purchasing a long-term care insurance policy to cover the potential future expenses.”

You’ll notice that because of the annual inflation of LTC expenses, today’s $75,000 per year becomes $158,503 in 18 years when the hypothetical LTC event occurs.

Of course, you can change the variables to do some “what if?” calculations of your own.

The alternative to saving $10,505 per year in this instance would be to purchase long-term care insurance with enough benefit to cover much of the potential costs. The long-term care premium would be less than the $10,505 per year in invested savings. Premium rates differ based on age at the date of application, overall health and the amount of coverage purchased. In general, a relatively healthy couple in their early 60s could obtain three years of coverage at $150 per day with 3% compound inflation, 90-day elimination period for around $3,500 per year. Premiums are generally less expensive the earlier you apply if you are healthy. There are many ailments and conditions that can show up between 55 and 65 that cause the cost of policies to climb the longer you wait.

The premium would rise over time at different rates depending on the claims history of all of the people who purchased the same policy.

If you never qualify for long-term care or have only a brief need, your premiums would not be recovered. Alternatively, your own savings intended to self insure would be available to you for other goals or to bequest to your heirs.

In many cases, when long-term care is needed – particularly expensive nursing home care or full-time care in your own home – the cost of the LTC insurance could be more than offset by the benefits paid out in less than two years.

It’s an important consideration. Even if self insurance is the answer, that conclusion should only be reached after thorough review of the pros and cons in the context of your overall financial plan.

For more information about recent changes and challenges of the long-term care insurance industry, please read this article I wrote in the Tacoma News Tribune August 1.

To do:

  • Use the calculator to determine what you may need to save in order to be able to self insure your long-term care needs.
  • Determine if you are healthy enough to qualify for a long-term care policy.  Most LTC insurance carriers will not accept people who have heart issues, diabetes cancers or other conditions that would make them more likely to become disabled.
  • If you are healthy enough, then contact your financial professional to get a quote for this insurance.

~ Gary Brooks, CFP® — Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

www.BHJadvisors.com

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Life Settlements Offer Alternative to Insurance Cash Value

Posted on May 18, 2012 | Leave a comment

Occasionally a senior who owns a permanent life insurance policy with cash value will decide that the policy is no longer needed. Lives and goals change and the once important purpose for this policy may no longer be.

When this happens most policy owners either stop paying the premium and receive the cash value from the policy or if the premium payment has become a burden, they work with the insurance company to lower or eliminate the premium in exchange for a reduced death benefit.

For many of these folks, there is a third option, a life settlement.

A life settlements company is a third party that buys the insurance policy from the insured for a higher price than the cash value of the policy. The life settlement company continues to pay the premium and becomes the beneficiary of the policy when the insured dies.
Often, a life insurance agent will shop the client’s policy to a variety of life settlement companies. These life settlement companies value each insurance policy using a variety of factors including:

• The gender, age and health of the insured—to determine life expectancy.
• The size and type of insurance policy—to help determine payout amount.
• The annual payments required to maintain the policy—to manage cash flow.

Then, the companies make independent bids for the policy. Almost always these payment amounts are meaningfully higher than the cash value of the policy. The policy owner picks the best offer and can use the money however he or she sees fit.

The creation of the life settlement business is the result of a 1911 U.S. Supreme Court decision where Chief Justice Oliver Wendell Holmes and the rest of the court agreed that a life insurance policy is a capital asset that is similar to a home, car or an investment portfolio. After the initial placement of the policy, the policy owner does not need to have an “insurable interest” in the insured.

Keeping the policy
Of course, if the cash value is not needed to fund current expenses, it may be wise to hold the policy until death for the death benefit, which will likely be much larger than the life settlement offer or current cash value. If the originally intended beneficiary no longer needs the proceeds of the policy, the beneficiary could be changed to a non-profit organization or community foundation. It’s also important to remember that death benefits from life insurance are generally tax free to the beneficiary (although they are not tax free to investors in life settlement funds.)

Understanding the options of your existing policy is an important first step. Exploring non-traditional options to meet your current financial needs may be a valuable next step.

Before you make a decision, you should speak to your insurance agent, accountant and/or financial advisor to understand the impact on your financial security now and in the future.

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

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Long-term care costs … still expensive, but growing slower in some cases

Posted on April 20, 2012 | Leave a comment

The cost of long-term health care services has historically advanced at a fast pace. When we consider long-term care costs and insurance policies in our comprehensive financial plans, we assume those costs will double general inflation and grow approximately 6% per year.

According to Genworth’s 2012 Cost of Care Survey, long-term care expenses have moderated a bit for in-home care and nursing home care. These costs have lessened moreso nationwide than in Washington state, however.

Some interesting numbers courtesy of the Genworth study, as relayed by the South Sound Business Examiner:

  • Most people prefer in-home care whenever possible. The cost of in-home health aide services in Washington has risen only slightly over the past five years. As the need for these services has grown, competition to provide service has increased keeping prices in check.
  • Nationally, the median hourly cost for home health aide services is $19. In Washington it is $22 per hour. The cost reflects an increase of less than 1% over the past five years.
  • The median annual cost for care in an assisted living facility is $39,600 nationally. The comparable cost in Washington is $51,000. The national yearly cost for assisted living has increased 5.7% a year over the past five years, while long-term care costs in Washington have increased 7.2% a year during the same time period.
  • Nationally, the median annual cost for a private nursing home room rose 4.3% annually over the past five years to $81,030, while costs in Washington increased 4.6% a year during the comparable time period to $96,842.

While competition has grown due to demand for these services, insuring against the risk of long-term care expenses has gotten a little less competitive. Two years ago, MetLife exited the LTC insurance business. This year, Prudential followed. Because more claims have been filed on LTC insurance policies, the business is less profitable than some insurers would like it to be. Others that have not left the business have revised their pricing significantly.

It’s important to think about the critical role that health care expenses play in your overall financial security. In many cases, protecting against the risk of large expenses is a wise move. Long-term care insurance policies can be designed with many different variables that impact the price and the coverage. It’s important to design coverage that fits with your overall financial plan.

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

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