From the May 2010 issue of Investment Advisor • Subscribe!

Easy Rider Redux

Advisors might find a tough subject easier to broach with clients

Long-term care insurance is complicated. It's also a hard topic to address with clients who often don't want to think about the possibility that they might end up unable to care for themselves --or who don't want to spend money on coverage they might not need. This can make it hard for advisors who try to be sure that all their clients' bases are covered when it comes to protection.

The subject might have just gotten a bit more approachable, however, with Genworth Financial's new take on its hybrid annuity that offers a single-premium, non-qualified deferred annuity bundled with a long-term care insurance rider. The policy, called the Total Living Coverage Annuity, saw a pilot issue in 2008. But the new version may be more appealing, thanks to the Pension Protection Act of 2006. On January 1 of 2010 a couple of provisions from that law took effect to make LTC payouts from the annuity tax free and also allow the coverage to be paid for with a tax-free 1035 exchange from another annuity or life insurance policy.

Jesse Slome, executive director of the American Association for Long-Term Care Insurance, is delighted to see the new product out there on the market. He says such products "offer the greatest single new opportunity for investment advisors to protect their clients." He cites two reasons for this.

First, Slome says, "up till now [advisors] have stumbled in terms of being able to comfortably tell clients why they should pay for insurance protection that they might never use." Even though, he points out, an advisor can "argue till you're blue in the face" that all insurance is something the client may never use, these hybrid products largely eliminate that concern for clients, since they're first and foremost investment products.

Second, he says, once interest rates rise again to the 7%-8% range, advisors will be able to point out to their clients what a great bargain they're getting on LTC insurance. Such riders, he explains, range in cost from half a basis point to about one and a quarter basis points, the average being about three quarters--which admittedly on an annuity only paying 3%-4% can be a bit of a hard sell. But once the rate goes up, he says, it will be a bargain because "you'll only be giving up a tenth of the return." He also feels that the ability to make a 1035 exchange will be a big motivator for advisors "with money on the books and looking for a way to offer [clients] something that doesn't cost them anything."

While there are currently "a handful" of such policies available, Slome believes that as interest in them rises, so will offerings as insurers create policies to satisfy consumer demand. In fact, he says three or four other companies are currently considering offering such a product.

Even though a hybrid annuity is definitely "for the right client"--a narrow segment of the marketplace that has a pool of discretionary savings, "pretty much a minimum of $75,000-$80,000" that they can move from one place to another without disrupting their retirement or savings, it has a distinct advantage. If the client never has a claim, or has one that lasts less than three years, the coverage will be very welcome. If a claim lasts longer than three years, the hybrid product "will probably not be sufficient." But, Slome points out, because the main product is an annuity, it's only part of the money that the client has and insures some of the risk--buying the family time to figure out what to do if the claim runs longer.

And Another Thing...


Marlene Y. Satter, a freelance business writer who can be reached at harpwriter@verizon.net.
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