Are Combination Products Poised For Take-Off?

Life and long term care insurance, annuities and LTC insurance, life and critical illness insurance, disability income and long term care insurance, critical illness and long term care insuranceBesides being a recipe for alphabet soup, these are some of the combination products about which the insurance sector is seeing or hearing.

The concept of combining different risks into one product has been around for a while, but execution has been lagging. Are combination products now poised to take off?

There is some evidence that consumers want them. A recent series of focus groups on critical illness insurance indicated that consumers recognize the need for various insurance products but feel they cant afford them all and need to make choices. The focus group participants themselves suggested that companies offer “hybrid” or conversion products that would provide multiple coverages for less than the cost of buying each individually (see NU, August 23/30, 2004).

And companies are designing them. A review of company activities over the last year or so shows a wide variety of combination products, on the shelf or on the drawing board. Here are examples:

Life insurance with long term care. This combination seems to be the most prevalent. A cash value life insurance policy (often universal life or variable universal life) provides the life insurance benefit. LTC coverage is provided as a rider or as an acceleration of the death benefit.

There often are options to increase the total sum paid beyond the initial death benefit of the life policy. For example, one company offers a rider that increases the amount of money available for LTC to 2 times the death benefit of the life policy. Other products offer optional riders to extend LTC benefits after the original death benefit has been depleted, for a specified time or for life. Another feature in some products is a residual death benefit that provides a limited death benefit, even if the LTC expenses exhaust the original face amount of the policy.

Disability income insurance with long term care. DI insurance protects individuals against loss of income due to disability during their working years; LTC insurance protects individuals from having to spend their income and assets (whether during their working years or, more commonly, after retirement) on the high costs of extended care. Thus, the combination of DI with LTC insurance seems to make sense. One company offers an exchange of a DI policy for an LTC policy between the ages of 60 and 70, without evidence of insurability. Other variations on this concept include offering a future purchase option that allows the insured to buy LTC insurance at some point in the future without evidence of insurability.

Annuity with long term care insurance. One of the more frequently mentioned combinations of annuities and LTC insurance is using an immediate annuity to fund LTC insurance premiums. Other variations include penalty-free withdrawals of the annuity accumulation value; two-tier annuities, where the higher value, which is greater than the surrender value, is available only for qualifying LTC expenses; and immediate annuities with LTC riders that offer increased annuity payments if the annuitant is disabled.

Life with critical illness insurance. More common in Canada, a CI rider is added on to a life insurance product. The CI benefit is in addition to the life insurance death benefit. Another option for a life/CI combination is to offer an accelerated death benefit if the insured is diagnosed with a critical illness.

Multiple product discounts. Property and casualty companies have long offered discounts to clients who buy both automobile and homeowners insurance. For individuals who purchase CI and disability coverage at the same time, a Canadian insurer offers a 5% permanent premium discount on both policies.

So, will combination products take off?

That depends on a number of factors, including the following:

–More companies with combination products. A number of companies, including several major ones, are offering combination products, particularly of the life/LTC insurance variety. More companies will need to introduce the product to achieve critical mass, so that combination products become more mainstream and commonly touted by agents and brokers.

–Simple concepts. Life insurance and LTC insurance can be complicated products on their own. Agents who are successful at selling LTC insurance are those who focus primarily on the sales of that product, according to LIMRA research. If companies merge a complicated life product with a complicated LTC product, chances for success are diminished unless the companies can find a way to simplify the presentation. Producers wont sell what they dont understand. Product features need to be clear enough so producers who focus primarily on life insurance are reasonably comfortable with the LTC features and vice versa.

–Provide a reasonable level of benefits. If, in a life/LTC insurance combo, the LTC benefits are insufficient to cover the actual costs of long term care, the industry could be doing a disservice to its clients. If a client thinks she has LTC insurance only to find out, when she needs it, that coverage is very limited, the client may be more than just disappointed; she may also seek legal recourse.

It has been suggested that a life/LTC insurance combo could be used in conjunction with a traditional LTC insurance plan. For example, the combination product may be used with a less expensive LTC insurance plan with a relatively short benefit period. If the LTC policy benefits run out, the client can access the benefits in the combo policy.

Consumers have shown some interest in combination products and more companies are promoting them. Whether sales will take off remains to be seen, but recent activity suggests that these products will continue to gain ground.

Elaine F. Tumicki, CLU, ChFC and LLIF, is corporate vice president and head of the Product Research Center at LIMRA International, Windsor, Conn. Her e-mail is etumicki@limra.com.


Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 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.