As the wave of baby boomers continues to reach age 60, ensuring their retirement security will be the driving focus of leading companies serving this market. The insurance industry recognizes the need to create new products now to help boomers face their unique retirement challenges.
Longevity has become a real concern, and guaranteeing lifetime income will be critical for preserving quality of life. Access to affordable long term care becomes increasingly important as longer lifetimes bring increased risk of declining health. Boomers' misjudgments about what is required to enjoy retirement are also a concern, as results from the 2006 3rd Annual Lincoln Long Life Survey found.
Underestimating the effects of inflation, the amount they will spend in retirement and the significant costs of LTC are areas where boomers may be miscalculating how much they will need in retirement.
The survey found 32% of respondents expect inflation to be the same or lower over the next 20 years than over the previous 20. And 65% are underestimating their projected spending levels in retirement, predicting they will spend less money per year while retired than while working.
The survey also found an alarming 66% of respondents said they do not have any LTC insurance, and only 26% have even considered purchasing a policy.
This is clearly an indication of weakness in boomers' planning. The costs for LTC services are rising at a rate that consistently outpaces general inflation in the economy. In 2004, according to the Congressional Budget Office, the average annual cost of nursing home care was $70,000. In some areas, the costs are much higher. By 2025, when today's 67-year-old turns 86, these costs will average $140,000 a year, according to a report by the U.S. Senate Special Committee on Aging. For an average 2-year stay, this would result in an approximate cost of $280,000.
The opportunity for insurance products that combine longevity and LTC protection for consumers is clear. Carriers are looking for ways to address these multiple needs in the most efficient way.
The recently enacted Pension Protection Act of 2006 will help spur further combination product development. It opened the door for product innovation and design creativity by allowing the introduction of tax-advantaged combination annuity-LTC insurance products, starting in 2010. Under the PPA, the annuity distribution payments in a combination annuity-LTC insurance product will not be taxable if used to fund qualified LTC expenses.
Such hybrid products offer clients the ability to use personal assets to meet more than one need. By combining these 2 elements on one chassis, insurance companies are seeking to offer the right mix of longevity protection and LTC insurance. The annuity component focuses on addressing income and longevity needs by providing a lifetime income stream. The LTC insurance portion focuses on providing access to affordable care should the need arise.
