If H.R. 2830 is enacted, it could further the development of combination annuity/long term care insurance products in several ways. This article reviews the current status of such combo products and also how they might evolve post-H.R. 2830.
Currently, annuity products provide LTC benefits in three ways. The first is a relatively common waiver of surrender charges, triggered if the annuitant or owner, depending on the contract, cannot perform at least two of six activities of daily living (as in many stand-alone LTC policies).
The second enhances an annuity benefit if an LTC requirement is met. This enhancement often involves increasing the payment received from a single premium immediate annuity or the annuitization of a deferred contract. Examples: a 50% increase in payments received from an SPIA or a 10% bonus applied to annuitized value.
The third structure strongly resembles stand-alone LTC policies. It uses the annuity cash value to pay LTC benefits for a specific period of time (typically two years). An additional rider will continue the LTC payments (often at the same level) for, say, two to four years or for a lifetime. Often, the products have a 90-day elimination period before benefits start and a daily benefit defined as a percentage of account value, starting at the end of the 90-day elimination period. The benefit payments are considered partial withdrawals from the annuity and are so treated for tax purposes.
Charges for the additional rider are typically defined as a level percent of annuity account value and may vary by issue age. For example, at issue age 55, the charge might be 0.50% to 0.75% a year, while at issue age 65, the charge might increase to 0.80% to 1.20% a year for an additional four years of benefits. These charges typically would be waived after benefits had been paid for a specific period.
Variations on the third combo structure will benefit the most from passage of H.R. 2830. So, expect the most product development activity to occur here.
What’s in it for the consumer? Stand-alone LTC policies have been around for many years but have not reached the market penetration levels many insurers would like. There are ample reasons for this, including the common client objection about “paying considerable premium for something I may never use.” Annuity/LTC combos address part of this by providing surrender and annuitization benefits regardless of whether the LTC is ever used.