THE FEDERAL RESERVE raised the federal funds rate in 2022 from zero to more than 4% to combat high inflation. While those rate increases severely damaged the stock and bond markets, they made some financial products more attractive. In particular, there are three products that are more appealing now than they were a year ago: income annuities, long-term-care insurance and various interest-paying investments.
Like many people, to take advantage of low loan rates, I refinanced my home mortgage before 2022’s rising interest rates. By contrast, owning bonds in recent years didn’t seem compelling because bond yields were below the inflation rate. But as the Fed rapidly raised rates over the past year, bonds and cash investments have become much more attractive. Money market accounts, which had yielded 0%, are now paying more than 4%. Ten-year Treasury notes have seen their yields increase from below 2% to well over 3%. Other fixed-income instruments, such as Treasury Inflation-Protected Securities and Series I savings bonds, have also become more attractive.
Similarly, income-annuity pricing has become increasingly compelling as rates have risen. Insurance companies that sell annuities can pay handsome income thanks to three factors: gradually returning annuitant’s initial investment, earning interest on the money that annuity buyers invest, and “mortality credits,” where annuity owners who die young effectively subsidize those who live to a ripe old age. As bond yields have increased, insurers can earn more interest, which means the annuities they manage can pay more income. Both single premium immediate annuities and deferred income annuities now offer bigger payouts than they did a year ago.
Meanwhile, long-term-care (LTC) insurance premiums have decreased as interest rates have climbed. Insurance companies had earlier underpriced LTC policies, in part because they’d assumed interest rates would be higher than they were. But rising rates have eased some of the pressure that insurers were under. Result: Purchasing LTC insurance—both standalone and hybrid policies—is now less costly.
LTC? Not a huge fan. Lots of fine print that you learn the implications of years down the road.
“Meanwhile, long-term-care (LTC) insurance premiums have decreased as interest rates have climbed.”
What percentage did they decrease? Other comments indicate their premiums went up.
Existing stand-alone policies have been underpriced and are still playing catch-up to market rates over time and thus keep raising prices. Comparing policies for say a 65 year old today versus a 65 year old a year ago would show lower pricing. When I listen to hybrid LTC conference calls they are emphasizing that pricing today has declined 15-20% from what the companies were charging a year ago due almost entirely to higher interest rates.
“pricing today has declined 15-20% from what the companies were charging a year ago”—and a few years from now, that will read: “pricing today has increased 15-20% from what the companies were charging a year ago”
I’ll let you know what happens when we get our LTC premium notices in June…
Well, I was going to reply that LTC insurance is not necessarily less costly — my premium increased 19% last year and 6% the previous year — but then I recalled that my insurer stopped writing LTC policies a decade ago. Surely that must factor into premium costs as the policy holders age. Still, the policy is a keeper, with generous coverage and premium refunds at death if benefits go unused. I know this because I have used my state’s Bureau of Insurance consumer guide to compare coverage and costs. If you are shopping for LTC insurance, check first to see what resources your state may have.
Wow My LTC policy increased 27% in November after 47% increase the year before.
I’m more a fan of hybrid policies since they don’t increase premiums-they just are priced more appropriately at inception. Also I assume the stand-alone policies are playing catch-up on older policies to match their current pricing.