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Annuity/LTC Combos Also Need To Address The 'Frailty Years'

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The focus of insurance company combination annuity and long term care activities since passage of the Pension Protection Act in August 2006 has focused on deferred annuity vehicles of all manner and shape.

This is not surprising, as this is the area where insurers have experienced the greatest success in the last 5-10 years and where most annuity product innovation has occurred.

That may be changing, however, as insurers recognize the nature of their next great frontier for retaining and expanding the revenue dollar resulting from qualified and non-qualified fund accumulations. This frontier involves retaining and garnering the highest amount of revenue during distribution phases.

A strong effort is taking place to identify, for Americans, the risk of outliving one’s income. This effort is partly educational and partly enlightening, to change the mindset of retirees and near-retirees.

Ultimately, this will need to lead to product purchases by this vastly expanding market segment.

Consumer acceptance will likely be considerably greater and stronger if the new offerings not only provide for income flows as long as the annuitant is living, but also recognize the need to cover what may be called, broadly speaking, Part 2 of the retirement years.

Part 2 refers to the “frailty years,” when either physical or mental infirmities (or both) necessitate the retiree’s getting health care services.

It appears that the more successful sales will be those that help buyers address 2 or more critical post-retirement objectives.

Much analysis has already taken place to design LTC coverages that integrate with, and are superimposed upon, guaranteed minimum withdrawal benefits and other somewhat similar structures. The interest here, however, is to examine opportunities to integrate with immediate annuities, whether variable or fixed.

So, what is the industry going to superimpose on these vehicles?

The superimposed vehicle might provide just pure protection. This would include designs that layer a specific fixed benefit for a specified number of years on top of the immediate annuity benefit. This way, if the basic immediate annuity provides $5,000 a month, each month, as long as the annuitant lives, then the pure protection portion might layer on, say, an additional $5,000 a month, perhaps over a 4-year period.

Let’s discuss the implications briefly. The usual annuity treatment, involving exclusion ratios, results in part of the “basic” $5,000 benefit being taxable, as a result of interest earned. When the additional $5,000 benefit is provided and the underlying vehicle meets the requirements to be “qualified” LTC insurance, as defined in Section 7702B of the Internal Revenue Code, then the entire amount of $10,000 is received without tax consequence. That has significant extra value to the owner.

An alternative would be to provide protection that varies with the underlying annuity benefit. This design would work well with an immediate variable annuity, as superior investment performance would result in enhanced LTC benefits.

To illustrate, consider a VA that provides an initial monthly annuity benefit of $5,000. Further assume that the LTC benefit is 100% of the VA benefit. If investment performance is favorable, then the LTC benefit streams would increase, and of course still be received income tax-free. (Company tax counsel should review and assess any proposed product and tax structures for overall compliance with the relevant sections of the I.R.C.)

Design modifications can be made to provide LTC benefit floors and benefit maximums.

Another attractive alternative combines LTC insurance with longevity insurance. Longevity insurance provides deferred immediate annuity coverage, with initial payments commencing at some age well into the future, such as 85 or higher. Combining such annuities with LTC will help the retiree cover later year expenses at modest cost. (Of course, this puts more of a burden on the retiree to cover (i.e., self-insure) personal needs until that point.)

As the pace of innovation accelerates, more and more attractive combinations will emerge.

Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. His e-mail address is .