Few people understand the connection between financial markets and the price of long term care insurance. But the connection is real, and a better understanding can help you take advantage of timing opportunities to secure this important protection.
When it comes to long term care insurance policies, two types are available. Traditional long-term care policies serve a function: they pay benefits for eligible long-term care needs. And, according to American Association for Long Term Care Insurance (AALTCI)approximately 50,000 people purchase this form of coverage each year and it is estimated that more than 10 million Americans have purchased long term care insurance.
More recently, linked-benefit long-term care policies have gained popularity. These are life insurance contracts or annuities that provide some means of making payments when the insured person needs long-term care. According to AALTCI, up to 500,000 of these policies were purchased in 2021. However, the organization notes, that number included significant sales resulting from a one-time Washington state initiative.
Impact of rising interest rates
Interest rates play an important role in the pricing and profitability of many forms of insurance. This factor is especially true when it comes to long term care insurance where the insurer expects to generate revenue from premium investment for many years before it is time to pay. the benefits.
Rising interest rates have already led to changes announced by linked benefit LTC insurers, whether life insurance or annuity companies. A large company Life+LTC recently announced a 5% premium reduction on its policy that combines universal life with a long-term care benefit package with cash compensation.
Other companies are expected to follow, making it increasingly important to compare offers from major insurance companies. More long term care insurance experts predict that rising interest rates will continue to benefit buyers with lower premiums.
Buy discounted long-term care insurance
While interest rates tend to move slowly, the same cannot be said for stock markets. On Monday, August 22, 2022, the Dow Jones Industrial Average (DJIA) closed at 33,061 and the S&P at 4,138. Investors are well aware of the significant declines that have taken place since December 31, 2021, when the Dow closed at 36,386 and the S&P at 4,766.
This is where the link between stock markets and policies providing long-term care benefits can provide real value to those who are optimistic about future stock market upside.
Some of the latest hybrid long-term care policies offer opportunities to link growth in future policy values and benefit payout amounts to stock market performance. One of the newer policies offers several credit strategies that can be particularly beneficial if increases in equity value outpace interest rate growth.
The basic offering of this annuity-based contract links growth in policy values to interest rates. The company guarantees a minimum future interest rate of 1%. Therefore, if a couple purchases this policy currently when both are 75, they will pay $59,768. In 15 years, at age 90, the policy will have a guaranteed long-term care benefit of $78,758 paid to a maximum of $2,362 per month.
What makes this particular policy attractive at a time when stock markets are low is the availability of additional options tied to the future performance of the S&P market. Over the past 20 years (2001 to 2021), the average annualized return for the S&P 500 is 9.87%. The reference to 20 years is appropriate because the typical length of time between purchasing a policy and needing care services can generally vary between 15 and 25 years.
Choosing a long-term care insurance policy that offers the ability to grow future benefits linked to stock market performance can prove beneficial. This is especially true when purchased at a time when you sense stock markets are low. Some will say that you are buying long term care insurance coverage at a discount.
It is essential to compare policy options and growth limits
Insurance professionals familiar with these new options strongly advise working with someone who has a thorough understanding of the contractual terms of each policy. Insurance company brochures are marketing materials that generally do not provide in-depth details. Details are only contained in the actual policy contract. Contracts can be between 50 and 80 pages.
For example, it is important to understand if the policy offers an increase option that locks in stock market gains. When does this happen and what happens if the index falls below the particular benchmark? How much of the actual performance of the S&P is credited? There are often ceilings over the years.
The AALTCI can help connect interested consumers with long-term care insurance agents with linked benefits who are experts in linked-benefit long-term care policies. These expectations cannot predict future market performance, but they can help you find the best future hedge at the lowest possible current cost.