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.
A consequence of this treatment is the material reduction in tax consequences for annuities that have gains, if such gains are passed along to insureds in the form of LTC benefit payments. Perhaps this, more than any other observation, has annuity insurers excited.
Also consider the positive implications of offering 1 product to address 2 needs. Retirees especially are bewildered by the array of available choices; allocation of funds to address post-retirement issues is a huge cause of anxiety and concern. Insurers are consequently uniquely positioned to offer simple combination solutions to allay such concern.
For example, life/LTC combinations address risk-free allocation strategies and LTC protection needs. Deferred annuity and LTC combinations can do the same, while providing for continued tax-deferred accumulations and the potential for attractive and assured income flows. And immediate annuity and LTC combinations can provide such current income while providing for enhanced payments in case of chronic illness.
There are some additional critical issues worthy of discussion:
1. Combination offerings provide the means for insurers who do not sell stand-alone LTC policies to address a critical need of this growing pre-retirement and at-retirement population while minimizing the need to take on huge LTC risks and administrative obligations.
2. Such policies can be simpler, and perhaps more importantly, look simpler to producers and prospects than more conventional offerings.
3. Even such simpler policies can address key target market concerns such as cost, including the effect of inflation in the future.
4. Combination contracts can, if desired, offer the same range of features available in stand-alones.
5. Companies developing annuity/LTC combinations must keep in mind the needs of their distribution, particularly when it comes to speed of issue and underwriting conflicts. Careful design and market positioning can address this concern.
6. It is worth reemphasizing that combining careful market strategy and creative product design is essential.
In conclusion, it is apparent that the writers of the PPA wanted to encourage such combination business. Careful attention to critical issues dealing with market, distribution, product, and execution should result in considerable success to providers.