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Adding LTC Features To SPIAs Could Spur Greater Immediate Annuity Sales

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The relative lack of success of immediate annuities remains a major concern for the insurance industry. The chart on this page shows reasons frequently cited for the disappointing sales seen so far.

Even so, immediate annuities are bound to increase in popularity in the coming years. As many articles have pointed out, demand for financial guarantees is growing. So is the risk that people may outlive their money due to increased longevity.

Insurers that will benefit most from this pent-up demand will be those offering single premium immediate annuities designed with these needs in mind. In particular, they will market SPIAs that can meet multiple buyer concerns associated with long term care needs in the later years.

The timing of the sale of such a product, around retirement, matches quite closely the time when many buyers first start worrying about how they will fund their long term care. (It is preferable that LTC needs be addressed at earlier ages, but consumers have not demonstrated such wisdom.)

What would such a vehicle look like? By and large, it would look very much like any other SPIA. That is, the single premium deposit would buy a stream of payments.

However, and this is key, such SPIAs would also provide for an enhanced stream of payments should the annuitant become chronically ill. But the product structure will need to address several issues, which follow:

What is the trigger? The trigger will likely be some kind of chronic illness definition. There may be considerable appeal in basing the trigger on an expectation of permanent chronic illness. This is being market tested.

Note: The most prevalent definition of chronic illness–that the individual is unable to perform two out of six activities of daily living or requires substantial supervision as a result of severe cognitive impairment–is not necessarily the definition that ought to be used in the SPIA contract.

A better definition would be one that carries with it a higher degree of likelihood that, once increased, the benefit will remain at the enhanced level. Alternatively, the definition could include a longer than usual elimination period (compared to what is found today in typical LTC insurance contracts).

Is the benefit structure effectively a per diem structure? Recall that LTC insurance benefits are typically structured either on a reimbursement or per diem basis. Reimbursement designs pay back the insured (annuitant) for expenses incurred, while the per diem policy pays a stipulated benefit as long as the covered individual remains chronically ill. Given the public demand for simplified policy structure, the latter makes more sense.

Can the benefit structure provide for inflation protection? The answer is absolutely yes, in the sense that inflation can be reflected at least until the start of the payment stream. To meet demand for simplified structure, a guaranteed renewable payment structure–where the payout amount can vary on a class basis–is not recommended. Consequently, some conservatism in the payment structure, in exchange for assured payment streams, may be in order.

What about underwriting? At least one insurer has tried issuing a combination of a (deferred) annuity and an underwritten LTC contract. The hope appeared to be that the packaging would be viewed as a positive. Unfortunately, the experience was quite poor. It is likely that a chief reason for this outcome is that financial representatives generally dont want to wait for a long, drawn out underwriting process to take its course, with the real possibility that some cases will be declined and, therefore, no commissions paid for the reps efforts. Even when such cases are approved, there is still a very lengthy wait in store before the commissions are paid.

Thus, we arrive at our recommended structure, in which SPIA policies are issued on a guaranteed issue basis. Can a company protect itself from adverse selection with such a design? The answer is most decidedly yes. We see having a no coverage period of, for example, seven to 10 years as providing the protection needed.

Can this policy be issued in a qualified plan? Legislation is pending in Congress that would allow employers to provide financial counseling services to qualified plan participants. If enacted, some observers believe employers will be under severe pressure to offer annuity options to participants, in part, to protect themselves from lawsuits should cash balances run out before the participant dies. In such a case, the natural next step is to explore whether one can structure annuity options that address contingencies other than death, such as LTC needs.

In sum, the addition of LTC to the SPIA may provide the missing ingredient needed for the SPIA business to achieve the business traction it has been seeking.

, FSA, MAAA, CLU, is president of Actuarial Strategies Inc., Bloomfield, Conn. E-mail him at [email protected].

Reproduced from National Underwriter Edition, April 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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