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Life Health > Life Insurance > Term Insurance

CBO economist exposes an LTCI enemy

By Allison Bell

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The Federal Reserve Board has a huge influence over short-term interest rates, but the Fed, and many economists, say the bond market itself still has the most influence over long-term rates.

Borrowers like low interest rates. Life insurers, which have huge pools of assets to invest, and many long-term annuity, long-term disability (LTD) insurance and long-term care insurance (LTCI) obligations to meet, tend to hate low rates. Low rates hurt their portfolio yields.

So, why are rates so very, very low?

Wendy Edelberg, an economist at the Congressional Budget Office (CBO), gave a presentation on some of the factors influencing long-term interest rates Monday in Washington, at a meeting of the Social Security Trustees Working Group.

She told that some of the factors pushing rates up relative to the average prevailing from 1990 to 2007 include a decrease in investment from abroad as a share of output, an increase in federal borrowing, and a “decrease in [the] private savings rate because of an aging population,” according to a written version of her presentation posted on the CBO website.

Factors pushing rates down relative to the 1990-2007 average include a lower rate of inflation, slower labor force growth, lower productivity growth, an increase in demand for safer assets — and an “increase in private saving because of greater income inequality,” Edelberg said.

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