The Pension Protection Act passed and signed this summer greatly enhances the appeal of combination (or integrated) insurance products.
Such products have largely been life insurance and long term care combinations. The PPA will, without question, give a huge boost to annuity and LTC combinations.
We are talking products here, but products must ultimately meet market needs, and products designed without market focus frequently fail.
The companies selling the most successful life/LTC combination offerings have recognized this. However, a review of the history suggests staying power was needed to achieve the desired focus.
That focus was, perhaps surprisingly, on positioning the combination product as an alternative to the client’s risk-free holdings or close-to-risk-free holdings, and then as an alternative to more conventional LTC policies. This was critical, because it enabled wirehouse and regional broker-dealer representatives and bank representatives to sell the policies in meaningful quantities. The policy was an offering consistent with their role as financial advisors.
Given that the products could address a critical objection to stand-alone insurance policies–i.e., that they were “use it or lose it” vehicles–it is no surprise that the combo vehicles became significantly successful. (Note: Recent life and LTC offerings have achieved considerable market penetration, according to industry statistics.)
Now, with the PPA, there is impetus for combination business in several areas. These include:
1. The concept of qualified LTC insurance is now extended to riders within annuities as well as life insurance contracts.
2. If a rider is a qualified LTC insurance contract, accelerated or other LTC benefits are generally received income tax-free. (As is often the case, there is devil in the details, so precise contract provisions, wording, and administration are essential.) Thus, accelerating the benefits of a life contract has the same tax implications to the insured as the life benefits.
3. Because accelerated benefits from a combination annuity or life contract are paid earlier than they would be in the absence of such a provision, the benefits have a cost to them. Hugely important, then, is the PPA’s provision that charges against annuity or life insurance account or cash values are not considered distributions that result in taxable income, even if the distributions are paid from underlying contract gains. Of course, this is significant for annuity contracts, as it is brand new, but even for life contracts this is a substantial improvement over previous tax law. Now, providing 1099s for such charges are a thing of the past.
4.While the law seemingly becomes effective in 2010, there are in fact critical opportunities that are better served by early product development.