By Cyril Tuohy
The stand-alone long-term care insurance market may be dormant as buyers shy away from high premiums and the relative inefficiency of long-term care coverage, but the combination insurance product market is hot.
Combination products, otherwise known as hybrid insurance, pair long-term care coverage with an annuity or life insurance. In return for one or more premium payments at retirement, a life care annuity pays fixed, periodic payments. In the event of a disability, the coverage provides additional payment to help cover the costs associated with long-term care.
“Many of these are sold on a single-premium basis via banks and where many people have idle assets, and it’s easy for producers to suggest that they move assets into this new protection vehicle,” Carl A. Friedrich, a consultant with the actuarial firm Milliman, said in an interview with InsuranceNewsNet.
Traditional life insurance agents, long-term care advisors, banks and financial planners have shown “a lot of interest in combination products, Friedrich said.
While combination products have been in the market for as long as 20 years, they rarely attracted much attention. But with passage of the Pension Protection Act of 2006, rules governing combination products were clarified effective Jan. 1, 2010. Since then, combination insurance products have experienced double-digit growth, according to Friedrich.
More than 86,000 combination policies worth $2.4 billion in first-year premium were sold in 2012, an increase from the 72,000 policies worth $2.2 billion in first-year premium sold in 2011, which was itself a big jump from the 26,000 policies worth $1.2 billion sold in 2010, according to LIMRA statistics.
Chris Coudret, vice president of OneAmerica Financial, said combination insurance products avoid the “use it or lose it” risk associated with traditional long-term care insurance.
“In most cases, people make a single payment, effectively removing the risk of future premium increases,” he said.
Because simple long-term care products have no cash value, some policyholders who need very little long-term care or none at all look back on thousands of dollars of premium that – in hindsight – have gone to waste. Consumer confusion, product complexity and mistrust have also dampened demand for long-term care insurance sales, according to David C. Grabowski, professor of health care policy at Harvard Medical School.
The potential market for combination products is also much larger than for the individual long-term care market, long-term care experts said.
While between 15 percent and 25 percent of the 65-year-old population is ineligible for long-term care insurance, all but 2 to 4 percent of the 65-year-old population is eligible for a life care annuity, according to economist Jason Brown of the U.S. Treasury.
Brown, who testified last week before the Federal Commission on Long-Term Care, said that a gender-rated life care annuity could be sold more cheaply than either an annuity or a long-term care policy by itself, delaying the purchase of a stand-alone long-term care policy until closer to retirement.
Combination insurance products allow insurers to better account for trends in disability, longevity, investment returns and other sources of risk in designing and pricing policies, and present certain tax advantages, said Brown, one of several witnesses to testify before a panel appointed by Congress to explore ways to reform long-term care insurance.
Hybrid or combination insurance products appear to be gaining favor with younger buyers as well, a recent survey found.
More than one out of two (53 percent) buyers of the hybrid policies were under the age of 65 in 2011, compared to 48 percent of buyers in 2010, according to the 2012 Buyer Survey conducted by the American Association for Long-Term Care Insurance.
“A linked benefit policy has advantages that many pre-retirement consumers find attractive,” Jesse Slome, director of the AALTCI, said in a statement.
Many long-term care insurance companies abandoned the stand-alone market several years ago after they found they couldn’t underwrite long-term care risk profitably. The remaining companies have been forced to hike their long-term care premiums as the medical costs of caring for the elderly continue to rise, and as more people simply live longer.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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