Market Musings Blog

The long term care insurance market has changed a lot in the last few years. Many companies have exited the business (Unum, Guardian Life, Allianz, MetLife, Prudential). A few of the companies remaining (Genworth) are not particularly well-rated, having their own financial problems. Meanwhile, policies in place are experiencing huge premium increases. Genworth announced 50% premium increases for pre-2003 policies and 25% increases for new policies, along with lower benefits.

What’s happened? First, the lapse rate, which describes how many people pay premiums but drop their policies before they collect benefits, has been low. And of course, the cost of long term care has risen steeply. That’s meant high claims versus payments. The second factor has been the miserably low earnings that insurance companies are making by investing the premiums. With interest rates extremely low, companies can’t hope to earn even close to their cost increases for this product.

We say: buyer beware. Traditional long term care insurance is in trouble. As fewer companies provide coverage, the market will keep worsening, with the sickest insureds clinging to their benefits and fewer healthy  people signing up for the ever more expensive and scarce insurance. If you do sign up, you could be so squeezed by premium increases down the road that you drop the insurance just as you become more likely to need it. And that’s if your insurer even keeps offering the coverage.

Hybrid life insurance/long term care products may offer some hope, but again, buyer beware. These products are new, just like long term care insurance was once, so insurers really don’t know what their claims experience will be. And the policies are complicated, with varying bells and whistles.

If you can find a group offering at a reasonable price via an employer, consider it. But check into portability and how much the policy would cost if you if you left your employer.

You may be better off saving the money you would pay in premiums to cover your own care. You can control how much you save; and the money will be there for you, unlike a policy which you may end up canceling before collecting a single benefit. Talk to your advisor if you have any questions.

The outcome of the election in the US was simple, in our view: America decided to keep the status quo. The status quo – a Republican House, Democratic Senate, and Democratic Presidency – was what brought us the debt ceiling fiasco of 2011. We are about to be embroiled in that same scenario again – this time it’s the trifecta of automatic spending cuts, tax increases and a debt ceiling problem. A common refrain in the politico-sphere lately has been that since this is Obama’s last term, a spirit of compromise is in the offing. I don’t know what makes anyone think that. I think the President has all the more reason to stick to his guns, without another election hanging over his head. Thus, we expect a rollicking ride as Republicans and Democrats duke it out over how to avoid the fiscal cliff, offering up every bit as much entertainment as we had in the summer and fall of 2011.

Furthermore, some evidence exists that second terms for Presidents are less beneficial to stock holders than first terms. Second terms are apparently when we finally get treated as adults, served up the medicine that is good for America but which we really don’t want, resulting in a less than optimal economy. Time will tell on that one.

Lest we sound too bearish, remember that these negotiations can’t last forever, and that even if this second term isn’t as good as the first, the first wasn’t terrible for investors. As always, we believe that nearly every market offers some opportunity; it’s just a matter of finding it.

Maximum contribution levels to many retirement accounts rise next year. For instance, the 401k contribution rises to $17,500; the traditional IRA contribution goes to $5500. (“Catch-up” contributions for those over 50 remain the same, but add significantly to the amount you can put away. However, that legislation expires 12/31/12, and must be renewed to be effective in 2013.)

For a brief explanation with a link to the IRS’s pension plan limitations see here.

Several clients have inquired lately about how we think the election will affect the stock market. The answer is a sort of non-answer: based on historical data, the stock market has done well under both parties, and it has done poorly under both parties. So the election itself will have a negligible impact on the stock market. Indeed, stocks look forward. Today’s prices are reflecting conditions a few months hence. The market is already “past” the election and looking into 2013.

Interestingly, though, there is some evidence that the stock market may affect the election. According to InvestTech Research, if the stock market rises in September and October prior to an election, the incumbent wins 90% of the time. (See one article on this phenomenon here.) Intuitively, a rising market is indicative of satisfied investors who feel pretty good about the way things are going, and don’t want to change the status quo. Of course, 90% is not 100%. This year could fall into that 10% bucket; we’ll just have to wait and see.