The long-term care insurance industry has had a rough go the past 10-15 years. Stories of dramatic premium increases have shaped the perceptions of long-term care insurance, and forced many to hesitate or entirely bail out on obtaining the insurance coverage.
Part of the reason for the premium increases in the past is the low interest rate environment we have been in since the Federal Reserve (the Fed) began aggressively lowering rates in 2008. We have effectively been at a zero or near zero Federal Funds Rate from 2009 through 2015. Only recently, at the Fed’s December 2015 meeting, the rate was increased by 0.25%.
The Federal Funds Rate is a benchmark for the overall interest rate environment. Since the Fed rate has been near zero since 2009, other interest rates (bonds, annuities, CDs, bank accounts, and mortgages) have been very low, as well. Some of these can be a positive (low mortgage rates), and others can be a negative (low yields on investments and bank deposits).
All of this makes it extraordinarily difficult for insurance companies to find a decent growth rate on their internal investments, which in turn affects their ability to not only offer products with an appealing growth rate, but also maintain stable pricing on long-term care insurance policies.
All of this makes it extraordinarily difficult for insurance companies to…offer products with an appealing growth rate, but also maintain stable pricing on long-term care insurance policies.
A recent article on InsuranceNews.com, titled LTCi Business Could Get A Lift From Interest Rate Hike, speaks to how an improved interest rate environment could bolster the long-term care industry. For the past 7-8 years, LTC insurance carriers have had to come to the realization that we might be in a sustained low interest rate environment unlike anything we have seen in modern history. Because of this, they have been forced to use very conservative assumptions on their internal investment growth rates, and also price their LTC products higher than normal. They are attempting to stave off the premium increases that no policyholder wants to go through.
What this means is — If interest rates improve even slightly in the coming years (just a 1% increase is mentioned in the article), new LTC insurance premiums could be lower than we see currently, and existing LTC insurance policies will be better-positioned to maintain a stable premium rate. All good news for LTC policyholders (existing and new). This low interest rate environment we have experienced for so many years could be just what the LTC industry and its policyholders needed.
