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New Life For Life/LTC Combos

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There has already been a substantial increase in development activity of annuity and LTC combination products.

This has come fast on the heels of the new Pension Protection Act of 2006, which greatly enhanced the appeal of combination products by treating appropriately designed combinations favorably, for the first time, from an income tax perspective.

Now, life insurance plus LTC combination products are becoming more compelling, too, and that’s the topic here.

Life and LTC products have been sold for approximately 20 years. The typical design involves accelerating the death benefit should an individual become chronically ill. However, other types of “favored” benefits may be defined and may also be worthwhile.

As an example, Middle America has embraced the use of term life policies for life event coverage. But such offerings can be expanded to offer LTC acceleration features, too. For example, return of premium (ROP) provisions in term life contracts can be expanded to help fund a string of payments commencing with the date the ROP benefit becomes available.

Furthermore, such benefits can be expanded by another order of magnitude via the inclusion of an LTC provision. This would enhance the payout in event of chronic illness. The timing is right for this, since LTC need becomes most readily apparent in the years near and immediately after retirement–a phase of life that baby boomers are now about to enter.

The accompanying chart summarizes the PPA’s significant provisions in this area. A review of the key points demonstrates that it can now be said with confidence that any increase in payout in such designs will be received without tax consequences. There is a good chance that the entire amount can be received income tax free as well.

Other payout provisions in life contracts merit discussion in the LTC context, too.

For instance, many companies in the variable annuity marketplace have adapted their VA guaranteed minimum withdrawal benefit designs for use in variable universal life settings. The more popular of these GMWB features begin payout at age 65 or some minimum years after issue, and they promise to keep paying a certain amount for life regardless of the success of the investment portfolio.

Such a payment promise is certainly valuable if the owner’s separate account performance has been poor–and that, of course, is why it was designed–but it’s even valuable if the performance is good.

Whatever the investment performance, a Q-LTC insurance rider cannot only increase the amount payable upon chronic illness, but it can also make the entire payment income tax-free. (Here, contract wording is especially essential.)

The transition of more and more portfolios to the 2001 CSO Mortality Table for reserving purposes will also impact the combination life and LTC product world.

The new table has shrunk the cost differentials between permanent and universal life offerings. So, companies offering permanent insurance may wish to offer acceleration riders–because these riders enable them to offer LTC protection at very low incremental costs. Furthermore, offering LTC within limited-pay life plans largely creates the opportunity to address the LTC need well before the usual time frames in which LTC gets funded.

The use of paid-up additions, for example, would provide the buyer with greater LTC coverage as well as greater death benefit coverage. While not directly related to inflation, the dividends leverage increases in LTC coverage as well as increases in death benefit. Of course, in UL coverages, the excess interest mechanism will largely achieve the same objective.

It is widely known that near-retirees and retirees have expressed concerns and confusion about how best to use their financial assets to achieve multiple objectives. Offering products that address multiple needs–and needs that look simpler to producers and prospects alike–should therefore receive a favorable hearing in the marketplace.


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