MORE BAD LTC NEWS FROM GENWORTH

They announced plans to institute $1.7 billion in premium increases for its policyholders over the next several years. State regulators have already approved $500 million of the increases, which haven’t yet been implemented. They have approximately 274,000 long-term care policies and expect to pay out over $30 billion in claims over the next two decades. Startlingly, to increase their investment return, they revealed their intention to invest more heavily in junk bonds, private equity and other high-yield investments. Also, they continue to explore the potential sale of their insurance business portfolio. As to the rate increase, 24% of their long-term care policies are paid up, which means they are immune from rate increases. The latest and most shocking development is their March 8 announcement that they are “temporarily” suspending LTC sales through brokerage general agencies in all states. This does not impact existing customers and their benefits, but is a bad sign. This company at one time was the gold standard in the long-term care insurance marketplace and had a 25% market share, proving once again that nothing is forever and even the mighty can fall

NATIONAL DEBT

A dry subject, but very scary. Currently almost $22 trillion (the government’s unfunded obligations for Medicare, Social Security and veterans’ benefits add $105 trillion), that’s 76% of GDP. Although not a contest you want to win, that ranks us 43rd highest out of 207 countries. Even worse, the CBO projects this will rise to 100% by 2028. The US has the largest external debt in the world. The question is – does anybody care? The President has given no indication he’s much interested in the deficit, nor have Presidents before him. One House member said “concern about the deficit is so woefully out of fashion that it’s hard to even imagine it coming back into fashion”. Does it matter that the world is built on debt that will never be repaid? Interest on US debt is projected to be $389 billion in 2019 – that’s a budget item that must be paid or you risk a credit downgrade and higher cost of borrowing. Despite all of this, our government (both parties) continues to spend far in excess of revenue, the debt continues to balloon and there is not a word about this from anyone, except to gain a momentary political advantage. In 2005, the national debt increased by $554 billion and, in 2018, by $1.27 trillion. But isn’t our economy booming? Yes, but you can argue that the growth was bought and paid for with debt. What’s the input from the politicians? One side favors lower taxes and the other side new spending initiatives, both of which add to debt, are irresponsible and serve only to enhance re-election hopes. What can we do about this? Not much, except to hope for and promote more rational, realistic and clear-thinking people to run for public office. The sad fact is there’s no upside for the politicians to reduce spending – no political reward for doing it, but downside if you do.

NEW FINANCIAL TRANSACTION TAX

Described as a bad idea whose time probably hasn’t come. Among many other tax initiatives, there is now a proposal to tax the sale of stocks, bonds and derivatives at a rate of 10 cents per $100 of transactions. That two New Yorkers are among the co-sponsors is surprising, considering the harm this would bring to financial markets and the negative impact it would have on local employment. It is draped in objectives like “reducing speculative trading”, “addressing economic inequality”, “reducing high risk and volatility” and “redirecting investment that has flooded into transactions without economic value into more productive areas of the economy” (emphasis added). I position this as yet another revenue source for new spending, income redistribution and to fuel anti-Wall Street sentiment. While this is more a political message than a plan likely to become law, it’s a sign of the times. It is a sales tax on investors and another drag on investing and saving. A .1% tax on a relatively modest $10,000 ETF purchase, for example, would cost $10 – more than double the commission charged by leading online brokers. Other major economies that have adopted such a tax have had overwhelmingly negative results. 

On a similar note, and coming from the other side of the political aisle, is a proposal to increase the tax on corporations that buy back their stock. The 2017 tax cut law didn’t do anything to encourage companies to spend their new found cash on investment or wages, many choosing instead to buy back their own stock. Here again, there is not a lot of support for this and it’s not likely to become law.

STRANGER-OWNED LIFE INSURANCE

It will be a long time before this subject goes away. Back again – this time in the form of a New Jersey Supreme Court case, filled with hypocrisy and fraud – lots of bad stuff. A woman buys a life insurance policy in 2007, premiums are paid by unrelated investors and the policy is sold to a life settlement company in 2009 (when the contestable period expires). It gets worse. When the insured died in 2014, the carrier concluded that the policy had been obtained through fraud and declined to pay the death benefit (I’m betting they welcomed the business at inception and knew exactly what it was). The carrier claimed that, under New Jersey law, buying a life insurance policy for the sole purpose of selling it to a party having no insurable interest in the life of the insured is illegal wagering, that such a policy is void from the beginning, they should get to keep all the premiums paid and not have to pay the death benefit! The buyer/owner/beneficiary argued that a life insurance policy is a contract, not a wager, and that the death benefit should be paid. The stakes here are higher than they might appear. To require payment of the death benefit is to allow what was clearly a wagering transaction. If the court supports the carrier’s wagering position, are honorable life settlements illegal wagers? This is another example of how an abusive transaction has ripple effects into the proper uses of life insurance and life settlements.

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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