We recently looked into the burgeoning market for "combination" life insurance products that come with a long term care component. That was only half the story. Spurred by favorable tax rules that took hold in January of this year, an emerging class of combination annuity-LTCI contracts is already making waves in the marketplace. And, according to experts, they may eventually surpass their life insurance counterparts.
The annuity living benefits arms race has ended, but the pressure to innovate persists. Coming off a down sales year in 2009, annuity providers are left to find new, less perilous ways to make their products more appealing to the masses.
Enter the combination annuity.
The annuity-LTCI combo is an up-and-comer that some observers contend could quickly gain a strong foothold in the marketplace. For the tax-favored access to account funds that it affords contract-holders as a result of new rules that took hold this year, it's a simpler, less costly alternative to traditional long term care insurance.
At Milliman Inc., an actuarial consulting firm that provides insurance companies with product development guidance, "there's probably a dozen projects in our office alone" that involve development of combination LTC products, says Carl Friedrich, FSA, MAAA, a consulting actuary and principal in Milliman's Chicago offices. "We are seeing a high level of activity. What that tells me is that there is going to be quite an influx of combination products finally hitting the market this year and next."
Once the supply of combo products increases--only a handful of such products are available today (see the sidebar for a sampling)--demand should follow, asserts Scott Boyd, CSA, LTCP, vice president of long term care at National Benefits Corp, an insurance marketing agency in West Des Moines, Iowa. "I think the marketplace will take off when we have more of these products out there."
That supply-side surge could come soon, as the product pipeline apparently is full of annuity-LTC combos.
"I expect to see as many as four or five other [annuity combo] products by year's end," says Boyd, mentioning John Hancock, Prudential, Midland National, Allianz, Sun Life and Lincoln National as insurers that are likely to soon enter that market. While most such products figure to be built on a fixed annuity chassis, there's talk Lincoln National and others may be developing a variable annuity with an LTC component. Friedrich says Milliman also has worked with an insurer to develop a combo contract on an equity-index chassis.
Several factors make combo annuities appealing from the supplier perspective. For one, it's a way for suppliers to capitalize on tax rules created by the Pension Protection Act of 2006, including a provision that gives tax-free status to distributions from combination annuities used to cover LTC costs, and another that permits owners of life insurance and annuity contracts to move into a combo annuity via a tax-free 1035 exchange. (Those benefits apply only to non-qualified annuities.) Offering combo annuities gives insurers a means of holding onto assets they might otherwise lose via 1035 exchanges, notes Boyd.
"Frankly, for them, it's a defensive maneuver."
But there are offensive motivations as well. It's a way for insurers who don't currently offer traditional LTCI to enter that market. Compared to traditional LTCI (and to LI-LTC combos), annuity combos tend to be easier to design, underwrite and administer, Boyd points out.