The Time for Annuity/Long-Term Care Combos Is Coming

By Linda Koco
AnnuityNews

Some industry people are dusting off their combination annuity/long-term care initiatives and wondering if this is not the time to prepare the products for action.

Three and a half years ago, industry professionals had predicted that annuity combos, as they are called, would turn up some serious sales turf. In January 2010, a section of the Pension Protection Act of 2006 took effect. That generated excitement because the law permits federal tax-free treatment of withdrawals made from annuity combos to pay for qualifying long-term care expenses.

Insurance experts believed the tax benefits would be a compelling incentive to buy (and sell) the still-developing hybrid policies.

To the dismay of many, that didn’t happen. In fact, LIMRA and American Association for Long-Term Care Insurance both told InsuranceNewsNet that annuity combo sales are so small that their organizations don’t report on the sales.

That doesn’t mean it’s game over, though.

Carl Friedrich, a principal and consulting actuary at Milliman, said there are five or six carriers with annuity combo policies in the Milliman database.

“We are also aware of at least three other companies that filed annuity combos, and at least two of those had introduced them, but I don’t know if they are still offering them,” he said.

Last spring, one carrier — State Life Insurance Co., a OneAmerica company — even updated its annuity combo. The reason?  “To perform well in a sustained low interest rate environment,” the carrier said.

Called Annuity Care II, the combo is a single-premium policy that pays out long-term care benefits from the annuity value until that value is exhausted, and then pays care benefits from a “continuation of benefits” fund. The long-term care benefit “will never decrease due to interest rates and/or insurance charges and is guaranteed to provide at least five years of LTC protection, the company said.]

The interest rate factor

The State Life effort touches on a key issue — the impact of the prolonged low interest rate environment.

Jessie Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI), said the low rates are to blame for much of the drag on annuity combo sales.

The rates have been so low that there is not enough spread to be able to support the riders, he explained. “When rates go back up, to 6 percent or 7 percent, maybe then it won’t be so much of a problem.”

Likewise, Friedrich believes that “if interest rates pop back up, we will see more activity in this area.”

There are other problems that contributed to the drag. These include lack of familiarity with combo products, and challenges in the standalone long-term care market that dampened enthusiasm for the combos.

Insurers have tried to address their standalone long term care problems by implementing “risk-driven solutions,” observed Rich Tucker, vice president of Ruark Insurance Advisors, a Simsbury, Conn. actuarial consulting firm. These solutions have included large price increases, market exits, capacity limits and other measures to limit carrier risk.

But today’s standalone market problems are not readily fixable, he contended. “As a result, the needs of many consumers who need long-term care protection are not being served.

That’s where the annuity combos come in. “By nature, these products reduce risk to the carrier, because the two benefits tend to offset each other,” Tucker said. “For example, owners of long-term care policies tend to keep their policies rather than lapse. That means that the long-term care piece of the annuity combo helps increase annuity persistency — and that’s good for the carrier. 

“Meanwhile, the increased annuity persistency will help the carrier offset the cost of claims on the long-term care side.”

In addition, if the long-term care component of the product is structured with a “risk management design,” that would further reduce risk to the carrier, Tucker said. One way to do this would be to design the long-term care piece so that that the premium increases over time instead of staying level, he suggested.

“The premium could start lower than premiums for traditional level-premium contracts and then rise.  Think of it as something similar to yearly increasing premiums on a term life policy.”

The result would be a better match to actual long term care costs on a year to year basis, Tucker contended. “In addition, the policy wouldn’t need greater-prefunding of policy reserves in the early policy years as is necessary with level-premium contracts.” 

And, to limit customer uncertainty about the maximum price, carrier could build in a cap on the rising premium, he said, citing as an example a cap that is set at a specific age.

 “It’s impossible to see the future,” Tucker conceded, “but the more the product design is insulated from risk, the fewer the things that can go wrong.”

Status of life combos

Unlike the annuity combos, the life combo products have seen sales rise steadily. The products are typically single premium universal life contracts with riders that either accelerate the death benefit or pay a separate benefit in event of long-term care.

Sales of such products grew by more than 10 percent in 2012, with new premium reaching $2.25 billion, according to AALTCI. “This was the fourth consecutive year of double-digit growth, and some 90,000 combination policies were sold — 20 percent more than 2011,” Slome said.

Fifty-six percent of new life combo buyers in 2012 were age 64 or younger, he added, and 70.5 percent of new buyers who selected single-premium plans paid more than $100,000 for their contracts.

These sales mystify some insurance watchers, who wonder why life combo products haven’t suffered the slow-uptake of the annuity combos.

For one thing, the products have been around for several years so they have greater recognition in the marketplace, Slome said. 

Also, “the low interest rate environment is actually helping their sales,” he said, explaining that consumers have been reallocating money from their low interest-bearing accounts into the life combos. “For them, doing this is more economical than keeping money in bank CDs.”

Furthermore, the life combos can be an attractive sale for people who control and manage people’s money, Slome said. “It’s an easy sale, because people do want long-term care.” They may like standalone long-term care products, “but they don’t like knowing that if they don’t use it, they will lose (the money they put into) it.” For those people, the life combo — which pays for care if needed and/or at death -- is “an attractive product,” he said.

In a higher interest rate environment than today’s, however, the life combos probably will not be as attractive, Slome cautioned, because certain buyers will decide to keep their money in interest-bearing accounts.

Tucker thinks well-designed combo products should do well in any environment.  For consumers, the combos are a slam dunk, he explained. “Once they see it, they get it.”

What’s needed now is for companies and agents to become more comfortable with the products. The carriers need to use designs that limit the risk, and the agents need to adapt to offering a product that combines two sales processes — an asset-based process for the annuity component and a needs-based process for the long-term care.

There isn’t one single long-term care answer for everyone, Tucker concluded. “But combo products will be an answer for a lot of people.”

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].