Increasingly when you encounter senior impaired risk clients or prospects, you can feel confident that you can deliver good news to them.
Thats because you can offer them what is being called “impaired risk annuities” or simply “impaired annuities.” These are single premium immediate annuities (SPIAs) that give clients a larger payout if they have a health impairment that increases the likelihood of having a shortened life expectancy.
Given the growing boomer-senior market, these products may become increasingly important to your practice.
Until a couple of years ago, impaired annuities generally fell into two broad categories: structured settlements and what might be called moderate impaired annuities.
Structured settlements are used for legal/tort settlements. You wont be talking to clients about them unless you specialize in that market. They are not the focus of this article.
Moderate impaired annuities are regular fixed life contingent single premium immediate annuities written on people with neither minimal nor high levels of impairment.
The moderate impaired limitations arose mainly from the reserving standards. The reason for that is technical, but you should know some of the detail in order to understand the market in which these products now exist.
Here is a brief overview. The reserving standards grew out of concern about insurers offering better rates to impaired individuals and reflecting this in reserves on these lives. The concern was that the total payout annuity reserve liabilities would be reduced unless the reserving basis for non-impaired SPIAs was correspondingly increased.
Here is the complication: The latter would make regular SPIAs more expensive (assuming data could be made available to create a new reserving basis for non-impaired SPIAs).
As a result, insurers limited their offerings: on the high side, because of the reserving strain of having to hold full standard reserves for impaired cases; and on the low side, so as not to compromise standard SPIAs by reclassifying mildly impaired risks who were still open to buying regular SPIAs.
This brings us to current times. The reserving constraints started to change a couple of years ago. On the reserving side, an Actuarial Guideline IX-C was developed. This allows lower reserves on regular impaired annuities with this key proviso: A “medical assessment must support at least a 25% reduction in the expectation of life.”
The upshot? Lower and appropriate reserves now can be held on these cases without compromising standard reserves. This is because it is assumed the 25%+ cases are unlikely to have bought standard SPIAs.
It is true that most insurers are moving cautiously in this market. They point out that demand for these products has started to grow only recently. Also, many annuity insurers lack experience in underwriting the more highly impaired cases and in pricing the risks involved. Reinsurers also have been slow to come to the plate and for similar reasons.
Still, availability is growing and will likely continue to do so as insurers resolve these issues. Here are some trends to follow:
Expanded Offerings. You will now find offerings in two other major facets of the senior market. These are: the under-25% impaired seniors, and the very highly impaired seniors.
The under-25% offerings are coming from companies that are targeting the huge potential of the boomer/senior retirement market. Some insurers seem to making these offerings without necessarily reflecting this segmentation in pricing their regular SPIAs.
The very highly impaired senior coverages primarily target the long term care needs of seniors. Too often, people arent moved to buy LTC insurance until they can no longer qualify. Faced with significantly increased care costs and shortened life expectancies, these people are prime candidates for highly impaired annuities.
The number of players in this market is limited, reflecting lack of experience data, the high risks involved and the niche nature of the market. However, judging by similar markets in other countries and also by carrier interest, this promises to be a growing market segment.
Underwriting Differentiation. In the SPIA market, product differentiation has been fairly minimal to date, impaired or not. But underwriting differentiation, both in form and in substance, is pronounced.
Obviously, underwriting for impairments in a payout annuity is much different than for life or LTC insurance. For an annuity, you want to supply as much information as possible on all the reasons the proposed applicant has a shortened life expectancy. Time also works in reverse. That is, the annuitants impairments might get worse with time, so the person might be more apt to be declined, wait and re-apply.
For both reasons, insurance companies are reluctant to foot the bill for underwriting. Therefore, the form of underwriting generally used involves requiring the applicant to submit proof of impairment, including reports from doctors, hospitals, etc.
Some insurers help this process along in various ways. They may, for instance, provide non-binding estimates based on preliminary questionnaires. Others, primarily but not only in the under-25% market, base their rate offers solely on the answers to questions in the application. Still others, and particularly for the more highly impaired, may send out paramedics or even require an examination.
The substance of the underwriting is also different from life and LTC underwriting. For instance, cancer, a very serious impairment for life insurance, may not be deemed as indicative of better rates for an impaired annuity–because after initial survival, life expectancy might be quite normal.
As a result, understanding the nuances of companies can be most important in getting the best rates for your clients.
The Sales Pitch. To a large extent, the motivations and the objections you will encounter in the whole spectrum of impaired annuities parallel those of regular payout annuities. Others are quite particular to the need and level of the impairments. To some degree, selling impaired annuities opens the door to broad income discussion.
For instance, the primary pitch for payout annuities is the promise of income for life. This promise is true for impaired annuities, too, but it more clearly raises the objection of “losing” my money when I die (it also raises all kinds of questions about lifetime commitment, dying and visualizing the far-side years).
A common response is to offer some sort of minimum payment guarantee rider–e.g., 10 years certain. While this guarantee might “work” in some cases, it clearly isnt a reality-based response. It also weakens the leverage of life contingent annuities, especially for impaired lives and may be one of the unanswered hidden objections that compromise payout annuity sales.
It has been found that presenting a payout annuity, impaired or not, as an insurance contract can be an effective approach to selling them. This certainly offers the opportunity for removing the onus of “losing” ones money to the insurance company on death and has the added value of showing how any “forfeited” funds are, in fact, part and parcel of the leveraged income generated by the insurance pooling mechanism. Propriety programs are available for illustrating how this leverage works.
Another important aspect of selling especially impaired annuities is to stay focused on the objective–protecting remaining assets and providing peace of mind.
As you can see, a wide spectrum of impaired annuity offers is emerging for your boomer and senior clients. As the market grows, learn its ins and outs so you can provide the informed guidance your clients require.
, FA, MAAA, is president of & Associates, a Pacific Grove, Calif., actuarial consulting firm. His e-mail address is SC@IS4Life.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 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.