Fifteen years ago, National Underwriter featured a discussion of “combination” life/long term care policies that were just beginning to be offered in the insurance market, with an emphasis on the senior market.
Today, combination products are still in the market, but they are evolving. This article spotlights their direction. First, a recap on the original designs.
The most common versions of the early combination products featured LTC riders attached to universal life policies. These riders accelerated death benefits in the event of specified triggers related to LTC needs, typically with monthly benefit payments during the period of care.
The cost to the insurer of accelerating death benefits was very modest, since future death benefits were reduced dollar for dollar under this recipe for insurance. In addition, a portion of the accelerated payout in reality was taken from the cash value of the contract, which was typically available to the policy owner in any event.
In contrast to these low-cost riders, which essentially included a form of self-insurance, the NU article also discussed an alternative design. That approach featured LTC benefits that were independent of the underlying life insurance policy, with the LTC benefits having no effect on future cash values or death benefits payable under the base life policy.
Proponents of this second structure argued that seniors’ life insurance needs did not necessarily decrease with the need for LTC services, particularly as the life coverage was often intended to address estate planning needs.
Further, they noted that, in many cases, the accelerated benefit designs fell short of providing comprehensive LTC coverage, particularly for smaller life contract face amounts. As for the independent benefit design, it didn’t offer meaningful savings versus costs of a stand-alone LTC policy, in contrast to accelerated benefits. However, both approaches served to fund the cost of LTC insurance through a flexible premium, tax-deferred accumulation vehicle.
What impact have these products had in the market over the last 15 years?
A few companies that focused on these innovative combinations have had considerable success, but they have represented a small portion of the overall LTC insurance market. Now, several factors suggest changes are ahead.
1) Convergence of the two designs. Companies specializing in these markets in the last few years have recognized the strengths and weaknesses of each approach, and have put together combinations that include a menu of choices from both structures.
For example, a life base plan may be offered with a selection of a 24-month or 36-month LTC insurance payout of some or all of the full death benefit, with some residual death benefit preserved to address the needs of the life insurance beneficiary.
In addition, an independent LTC rider may also be attached to the same policy, extending the LTC coverage beyond the 24-or 36-month period for another range of months as selected by the policy owner.
Further, these combinations frequently offer inflation benefits, nonforfeiture benefits and other features that are standard in the LTC insurance marketplace.
2) The number of LTC insurers has shrunk considerably in the last five years. This has occurred despite the growing needs of this underserved market.
Many insurers that are not yet comfortable with the risks of stand-alone LTC insurance are exploring various flavors of products, which reduce those risks to the insurer, via death benefit offsets in accelerated benefit features or via the use of long elimination periods inherent in independent LTC riders.
Several other companies are intent on pursuing this marketplace and are actively considering products, which in some cases extend beyond life and LTC insurance.
3) Advances in underwriting. These advances are allowing insurance companies to become more comfortable with some of these exposures in the senior market.
In particular, cognitive assessment screens are becoming more sophisticated and streamlined. Cognitive tests that can be administered effectively over the telephone with a high level of accuracy, both in terms of detecting early stages of impairment and not signaling false positive results, are being utilized. This can be particularly important in the distribution of combination products.
4) Premiums for new stand-alone LTC coverage have increased. These increases are due to low market interest rates, high persistency and regulatory requirements.
As a result, producers are recognizing the need for more affordable forms of LTC insurance. Financial planners and banks also are increasingly recognizing the importance of addressing LTC needs. Many are finding these new combination products appealing as they advise their clients to reposition assets into these vehicles, providing a three-course serving of benefits including cash values, life insurance and LTC insurance.
Looking ahead, it will be interesting to see what new product developments emerge in the area of combination products.
Efforts are under way in Congress to clarify and enhance the tax treatment of life and annuity policies combined with LTC. Even with some open questions regarding tax treatment of some of these designs, the expectation is that companies will continue to move to meet the appetites and needs of consumers.
If clarifying tax legislation advances, expect to see an even broader menu of combination plans emerge, to the benefit of the insurers, distributors and consumers.