We see exciting new opportunities for the life insurance and annuity industry as a result of federal legislation with the enactment of the pension reform bill (HR4).
Now known as the Pension Protection Act of 2006, the legislation includes provisions that clarify and enhance the tax treatment of hybrid long term care insurance plans in which LTC benefits are coupled with either life insurance or annuities.
Several factors led to support from Capital Hill for these enhancements. First, there is increasing concern regarding the need for financial solutions to the growing costs of LTC.
There is growing pressure on Medicaid and states to meet these needs, with little indication of movement toward federal solutions.
At same time, industry figures show the private LTC insurance market dropped by almost 10% from 2004 to 2005, despite the fact that fewer than 10% of 80 million people in the U.S. target market have such coverage.
The decline in stand-alone LTC insurance sales relates to higher premiums being offered for new LTC insurance business, contrasted with premium levels on sales made 2 years ago. This has been triggered by low interest rates, high persistency, and LTC insurance rate stabilization regulations that require conservatism in pricing in order to reduce risk of future rate increases.
Elasticity in the LTC insurance market and general concerns about affordability have resulted in these reductions in sales.
These factors are in turn triggering an opportunity to bring new forms of more affordable LTC insurance coverage to the market. This includes hybrid LTC insurance plans. These have been emerging in various forms and flavors, but all involve some form of self-insurance that reduces the cost of LTC insurance.
One example is life policies that accelerate the payment of benefits when LTC care is triggered. Those LTC benefits, as paid, reduce future life insurance face amounts, with a proportionate reduction in cash values.
After the life face amounts have been paid out in full via accelerated benefits, there may be an optional, independent LTC insurance benefit that continues monthly payouts for a specified period. Some insurance companies will pay a small additional benefit at time of death, if all of the original death benefit has been paid out as LTC benefits.
Another example is a deferred annuity where account values are distributed, without surrender charges, in monthly payouts when the LTC trigger is met. Here as well, additional LTC benefits may be payable after account values are depleted.
PPA includes several clarifications and enhancements to the tax treatment of these plans.
First, charges taken out of account values are deemed distributions from a tax perspective. However, those distributions are not taxable; rather, they reduce the basis in the contract if the LTC insurance rider is tax qualified (TQ).
Second, TQ LTC insurance benefits are paid out tax-free, either from life or annuity platforms.