An LTCI product we actually want

Starting Jan. 1, 2010, your clients will be able to buy a financial product that combines an annuity with long-term care insurance. Since many Boomers worry as much about nursing home costs as about outliving their savings, the product is timely.

Contracts that combine life insurance and LTCI have been around for a while. LTCI/annuity hybrids--"combo" products--weren't viable until the Pension Protection Act of 2006 allowed annuity distributions to be tax-free if they're part of LTCI coverage.

The combos can take many forms but, in essence, they have two advantages for those who want to buy LTCI but don't like the high premiums and/or aren't in perfect health. First, it lowers the LTCI premiums. Second, it simplifies the underwriting process so that more people can qualify.

When a Watson Wyatt consultant named Mark J. Warshawsky first envisioned a combo product, he grafted LTCI onto a life income annuity with a period certain. If the insured person needed at-home or nursing home care, a combination of accelerated annuity payments and LTCI benefits would cover the costs.

This concept, called Life Care Annuity, would be cheaper than buying an annuity and LTCI separately. It mitigates the effects of adverse selection--the tendency for hardy folks to buy life annuities and the feeble to buy LTCI--and supplements the insurance with the client's own money.

But that was before the PPA. Since then, insurance company actuaries and product developers have altered the concept considerably. The newest products merge a fixed deferred annuity with LTCI. They reduce the cost of LTCI dramatically and eliminate taxes on the inside build-up of the deferred annuity.

Imagine a 50-something individual who has set aside $100,000 as self-insurance against health care expenses after age 65. If the money is in an existing fixed or variable deferred annuity, he can exchange it for a new annuity with an LTCI rider. If the money is in CDs or bonds, he can put it in a fixed annuity.

If the client needs nursing home or home health care, the annuity would cover the first $100,000 in costs and the insurance might cover the next $200,000 or the next two years, depending on the terms.By electing a huge deductible, in effect, the client would get the LTCI at a discount. All payments for care would be tax-free.

There are drawbacks. Combos will entail a ton of education and training. Regulators don't like the cheapest versions, because clients who stop care before their own assets are exhausted could receive nothing for their premiums. There are licensing issues, as well, because LTCI often requires a separate license. And qualified assets don't qualify for the subsidy.

But make no mistake. This product should have a big impact starting on New Year's Day. The relaxed underwriting will be good news to clients with chronic ailments. Advisors will jump at a chance to distribute tax-deferred annuity gains tax-free. Life insurers will get a new source of business--and a new reason to siphon annuity assets from each other.

Kerry Pechter is the author of "Annuities for Dummies" and editor of retirementincomejournal.com.