There are several combinations that make business sense

Insurers have long sought to develop products that adjust their benefits and premiums to match the needs of buyers as the buyers progress through life.

For example, insureds/owners should be able to specify their needs at some point during their lifetimes and thus have their changing needs be reflected in changing insurance packages.

The purpose of this discussion is to address several combinations that make business sense, and which are currently doable.

Transitional offerings such as critical illness insurance products that evolve into long term care insurance on or around retirement age are completely doable today without a need to address any special actuarial or legal (e.g., Section 7702B of the Internal Revenue Code) concerns.

A similar transitional offering that starts off as disability income insurance and transitions to LTC insurance is equally doable.

Although many buyers–and producers no less–would argue it is desirable to delay purchase until the time in life when one needs a particular kind of coverage, there are strong arguments for the transitional approach.

The strongest argument is the need to protect one’s insurability. That is one powerful reason to develop a life cycle approach to the purchase of insurance, and therefore, for insurers to offer such vehicles.

What would such an offering look like?

An insurance program would be designed by an agent or planner with the client, and the program would lay out the following.

Life insurance needs for the desired period of time. There is no reason why schedules can’t anticipate increasing needs over time. For sure, such programs can’t anticipate all kinds of changes, but they can anticipate key lifestyle events.

For example, insurance needs will increase at key life events, such as the birth of children, marriage (sometimes the marriage comes first) and grandchildren. Insurance needs for many might decrease at times (like retirement), although for others the need to fund estate taxes or perhaps their equivalent results in the need for increasing or second-to-die coverages.

The amount of accumulation focus could be a variable, so that the insurance schedule could either be heavily term in its structure, or very cash rich, or someplace in between.

Disability income needs are important, too, in one’s working lifetime, as should be critical illness, both of which protect against the effects of illness on one’s income. There is no reason why such plan benefits can’t be graded in anticipation of increasing income (on the DI benefit) and in anticipation of greater cost (on the CI benefit).

Actuarially speaking, the treatment of benefits that don’t commence immediately at issue can be appropriately priced for.

Tax-wise, these products can be structured not only so that they meet various tax code requirements, but so that they do it efficiently to the extent permitted by law.

How does the life cycle product deal with needs later on in life? Perhaps the most important protection vehicle that needs to be considered is the LTC insurance product. Yes, America is getting older and the financial industry needs to provide for programs in the later years.

In the life cycle context, one can either commence a new amount of a new plan of insurance, or cease an existing plan and “replace” it with a new one. For example, DI insurance may no longer be necessary around the same time that LTC insurance becomes important, so a natural transition can take place.

One point worth mentioning is that these vehicles do not have to all be under the umbrella of a life contract, which was the usual construct discussed in past years.

No longer having this structure in place avoids the inefficiency of having certain contracts be considered riders to life offerings. There is a significant tax inefficiency in this approach that can be avoided.

Financial planners and agents construct financial programs for their clients in very sophisticated ways.

The life cycle program promises to capture the essence of such work in a simple, integrated and eminently powerful offering.

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

Insureds/owners should be able to specify their needs at some point in life and have changing needs reflected in changing insurance packages