LONG-TERM CARE INSURANCE AND PRIVATE EQUITY

Multiple private equity firms are looking at the long-term care business.  They wouldn’t do this unless they saw a profit opportunity for their investors.  A transaction could take several forms.  The private equity firm could buy a block of long-term care policies outright and take over responsibility for servicing the acquired policies.  Or, assume payment of claims while the insurer continues to service the policies.

Several carriers, both of which have stopped selling new LTC policies, have acknowledged exploring these options.  John Hancock, which is owned by Manulife, was among the largest players in this sector, covering about 1 million individuals.  Similarly, Prudential, which has more than 200,000 policies, said they consistently evaluate these opportunities.  Maintaining this business has gotten expensive for the carriers, requiring large cash infusions to shore up long-term care reserves.   Prudential, for example, took a $1.5 billion pre-tax charge on its LTC business this year on top of $700 million it added to  reserves in 2012.  The combination of deteriorating claim experience and no new LTC business seems like it will produce opportunities for bargain sale prices that look good to private equity firms.  This is a business that many insurers would like to exit completely. 

But what about the policyholder?  It’s bad enough that your carrier no longer sells new policies.  How will you feel when your policy is owned by a private equity firm, whose goal is to maximize profit for its investors and they’re managing your claim?  Can you expect the same quality of care in claim servicing?  What about rate increases?    Private equity will still be accountable to the state  regulators, but it’s likely you should expect more frequent and severe increases. 

Private equity is not a new visitor to the insurance business.  Within the past year, VOYA sold off more than $50 billion of annuities to three firms and Hartford Financial sold $48 billion of annuities to six investors.

Net — this is a new and dramatic development that adds to the instability of the LTC market.  My outlook continues to be pessimistic — poor claim experience as longevity continues to increase, shrinking marketplace and higher prices — not pretty.  My advice to those thinking about long-term care insurance is to consider all the alternatives. 

LIFE INSURANCE BENEFICIARIES AND DIVORCE

Can a life insurance policy beneficiary designation be automatically changed by law upon divorce without anyone’s consent?  There are two recent court cases on this subject.  The first involved a husband     purchasing a policy, naming his new wife  primary beneficiary and children from a prior  marriage as contingent beneficiaries.  They later divorced, but neither the insured nor the divorce judgment addressed the policy.  The insured died and, needless to say, there was  litigation over who gets the insurance benefits.  The case reached the Supreme Court, which decided against the ex-wife, using the theory of presumed and probable intent.  The Court held that the Minnesota revocation-on-divorce statute did not violate the laws of contracts.

The second case has a similar fact pattern, except that the policy was owned by the former spouse when the insured died.  The Court decided (correctly, in my view) the state’s revocation-on-divorce statute was not applicable to policies not owned by the decedent at death.  The message is that the professionals advising the parties in a divorce need to react to a dramatic change in circumstances to avoid messes and understand intent. Otherwise, state laws will presume  intent.

2019 TAX NUMBERS

Not real exciting, but   important in planning.  Those limits subject to indexing moved very slightly or not at all.

· Estate Tax Exemption — $11.4 million per person.

· Gift Tax Exclusion — unchanged from $15,000 to any one person.  Gifts to a non-US citizen spouse are  increased from $152,000 to $155,000 per year.

· Health Reimbursement Arrangement — maximum employer reimbursement amount increases slightly to $5,150 for individual coverage and $10,450 for family coverage.

· Long-Term Care Premium Deduction — for clients who have sufficiently high uninsured medical bills to benefit from itemizing, they can include at least some of their  premiums in the medical expense total.  The threshold is age-based and either holds steady or  increases very   slightly for 2019.

· 401k, 403b and most 457 Plans — employee contribution limit increases to $19,000 with no change to age 50 and over $6,000 catch-up.

· IRA — last increased in 2013, the annual contribution increases to $6,000 while the $1,000 cost of living adjustment stays the same.

· Defined Benefit Penson Plans — annual benefit increases from $220,000 to $225,000.

· Defined Contribution Plans — limitation increases from $55,000 to $56,000.

· Top-Heavy Plans — definition of key employee increases from $175,000 to $180,000.

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