Fed Chair Janet Yellen read some prepared remarks today and said that the Fed is still on track to raise interest rates this year. While speaking about the rate increase, she said, “I anticipate that the pace of normalization is likely to be gradual.” When speaking about the Fed’s “target rate”, Yellen stated it may be several years before it returns to the 3.75% level the Fed considers normal. She repeated the Fed’s criteria for raising rates, saying “I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term.” These comments pretty much eliminated the possibility of a June rate increase during the next Federal Open Market Committee (FOMC) meeting on June 16th and 17th. However, it appears the market is now expecting the rate hike to occur sooner than December, based on futures market trading. It is still too early to tell when the Fed will ultimately raise rates. The crazy thing is that, even though we have known this is coming for some time, there will very likely be volatility when it actually occurs.
While a very small number of companies released earnings this week, the one’s that did had some interest insight into the U.S. economy. A few highlights from this week were:
Deere (DE) forecasted better than expected profit for 2015, as they are seeing demand for construction equipment come in above original expectations. This demand was able to offset slumping demand for its signature green tractors and helped boost shares higher. The agriculture sales are expected to decline further, as lower crop prices are leaving farmers with less money to spend, the company said on its conference call. Deere plans to counter-act the lower demand by reducing its inventories. “We’re facing the deepest downturn in North American large ag equipment in 25 years,” said Chief Financial Officer Rajesh Kalathur during a conference call. “We’re managing our inventories aggressively.”
Home Depot (HD) released its quarterly earnings, stating that a strengthening housing market helped boost sales. On the earnings call, CEO Craig Menear stated, “Overall GDP growth and a continued tailwind from the housing recovery will be the principle drivers of growth for our business.” Unlike most retailers, Home Depot’s biggest time of the year is now, when warmer weather spurs demand for consumers to work on their houses. The company admitted that two major headwinds that they face are a strengthening dollar and the Fed’s pending interest rate hike. As interest rates climb, demand for houses falls. Consumers are also less likely to re-finance their homes, which can give them cash for remodeling. Still, the company’s comments regarding the housing market overall were encouraging.
Long –Term Care Insurance:
With the costs of healthcare on the rise and as the average life expectancy continues to increase, many individuals want to know about long term care insurance (LTC) and whether it is necessary to have coverage. The decision is based on a number of factors and there is not a one size fits all answer. Some items to consider:
First, is longevity a trait in you or your spouse’s family history? The better the history of health in one’s family, the greater the likelihood that they will live longer than the average life expectancy age. 44 percent of men and 58 percent of women over the age of 65 will require some type of assisted care at a time in their lives. However, for those who enter a facility, nearly half of these individuals will stay less than 100 days. Most LTC policies have a minimum elimination period of 90 days (the period before benefits will start – essentially the deductible for these policies) and thus the policies are never utilized. It is also important to differentiate whether the elimination period is stated in calendar days or service days. A 90 day elimination period would be three months if based on the calendar. But if calculated using service days and you are only receiving care 4 days a week, this would amount to nearly a 6 months elimination period. Thus further increasing the likelihood that the benefits of the policy would not be used.
Next, what is your level of assets and resources? Those with limited assets may find LTC policies too expensive and these individuals may qualify for Medicaid to cover expenses. For those with greater resources, many may believe they are “self-insured” as their level of assets and income sources is sufficient to cover any extended period of care. For those in between, the decision is based on what your health is, your resources, and your goals (do you want to leave assets for loved ones?).
Previously, individuals could buy LTC coverage that provided lifetime benefits. Policies like this are no longer available, as current policies are now limited to a number of years. These years are actually a specific “pool” of benefits and thus are capped at a dollar limit. There are maximum daily dollar amounts with $300/day being typical. Therefore, a policy with a three year limit with $300/day in benefits would have a value of $328,500 ($300 * 365 days * 3 years). Additionally, policies can include inflation riders that will increase the benefit amount to be received over time. This inflation protection is beneficial as healthcare costs continue to rise at an alarming rate. However these riders can add as much as 50% to the premium of the policy.
Other factors to consider are that some policies cover home care services, while others won’t. Premium payments usually will end once you enter an assisted living facility, but some policies require you to continue to make premium payments if you receive at-home care. If married, it may be beneficial to review both individual policies and shared care policies to see if one option is cheaper. Under shared care, you purchase a pool of benefits that can be shared as needed. If the policy provides six years of coverage, and one spouse only needs two years of care, the other spouse has four years that they can use. This is often beneficial when a surviving spouse does not have a caregiver.
Insurance companies underestimated the rising costs of healthcare and the duration of the low interest rate environment, leading many companies to exit the long term care business. Those that remain are increasing premiums at a significant rate each year. While some policies may be affordable today, there is a strong possibility that they eventually become cost prohibitive in the future as premiums rise. Premiums for new policies on average increased 8.6 percent compared to last year, while some existing policyholders saw increases over 50 percent. Due to this, sales of LTC policies are on the decline. Total number of LTC policies being sold are approximately 1/3 of what they were a decade ago. Those that are buying policies are opting for lower cost policies with lower daily benefits and longer elimination periods. Combine this with the low interest rate environment and increasing healthcare costs, the only options carriers have to make these policies profitable is to continue to increase premiums. They have also created hybrid life insurance and LTC policies, but these are still relatively new and generally require a large lump sum payment up front.
Long term care coverage offers many the peace of mind that they will have sufficient resources to help pay for these expenses later in life. But if not carefully reviewed, individuals may pay too much for a policy with benefits that they don’t need, or benefits that don’t meet their needs. If shopping for coverage, be sure to understand what the policy actually provides and how it works.
Memorial Day Reminder:
As a reminder, the market is closed Monday in observance of Memorial Day. The Paradigm office will also be closed.