Are You Recommending the “Riskiest” of Products?
Financial advisors who have recommended long-term care policies must cope with the news that Fitch Ratings calls the insurance products among the riskiest sold by U.S. life insurers. The credit rating agency expects more carriers offering them to go bankrupt over the next several years, according to a new report.
“It’s not a great situation,” says Suzanne Fitzgerald, an advisor with the Dallas-area firm Exencial Wealth Advisors, which has $2.1 billion in assets under management.
Fitzgerald previously sold insurance, including LTC policies, for New York Life Insurance, which Fitch identifies as one of the carriers not facing high risks for bankruptcy.
Fitzgerald recommends that, for starters, advisors should always have clients understand the distinctions between mutual carriers and stock insurance companies – and if possible choose the mutual carriers, even though their policies are often more expensive.
A stock insurance company reports to shareholders for whom it aims to make a profit. A mutual insurance company, fewer of which exist in the United States, is owned by policyholders who are contractual creditors.
“I try to stick with mutual carriers,” Fitzgerald says, who now refers wealth management clients seeking LTC products to insurance companies, rather than selling the insurance to them herself.
Fitch, which ran a series of stress tests for LTC insurance providers, found four companies that have a “worse” adequacy of reserves, mostly stock insurance carriers.
For clients who have LTC policies with troubled carriers, they could face unwelcome news that their benefits have changed, Fitzgerald says. Under most state insurance regulators’ rules, carriers are able to change premium rates if they do so for an entire actuarially defined demographic group – all women, for example, according to Fitzgerald.
For some clients, though, some coverage is better than nothing, Fitzgerald says. But advisors should approach the policies with trepidation.
“The LTC industry is a difficult animal to predict,” Fitzgerald says.
Despite the dour predictions for providers of LTC products, Sheryl Rowling has no plans to tell her clients to stay away from the insurance entirely. “It’s a necessity in many cases. It’s an important part of building your safety net system,” says Rowling, the principal of Rowling & Associates in San Diego, which has more than $340 million under management.
But given the Fitch report, she adds: “It’s imperative for advisors to look at the ratings and securities of the underlying companies.”
Clients usually have the option to exchange existing policies for new ones, but the older policies typically provide greater benefits, sometimes creating tradeoffs between policy benefits and the confidence in the finances of providers, she says.
“It’s a real concern,” says Rowling, noting advisors can find themselves in a position of saying “I’m not so sure about the strength of the company, but should I have the client switch to a different company for worse benefits?”
Rowling concludes, “It’s a delicate situation.”