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The Value Of Combining Coverages? Lifetime Protection

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Lifetime protection is an elusive concept in the context of health insurance.

That this is so can be seen in how health insurance coverages are compartmentalized. There is disability income insurance for individuals during the working years. There is critical illness insurance, largely issued to individuals, also during the working years. Finally, there is long term care insurance for people near or already in retirement.

What about combining these vehicles into one structure? The concept has much merit. The likely candidates: CI and LTC in one structure, and DI and LTC in another.

From a company perspective, there is much to like in such vehicles.

1. Most importantly, these vehicles would work to keep policyholders with companies for much longer periods of time.

2. These products could be underwritten once, with focus on the first contingency rather than LTC.

3. The products could provide for purchase options to keep up with income levels and expected increases in long term costs.

4. By issuing such contracts at lower ages, companies are likely to experience longer initial periods of better morbidity. The argument here is especially compelling with respect to the LTC piece.

From a buyer perspective, there’s much to like as well. For instance, the fact that these products would be underwritten once, at a younger age, eliminates what could be a major problem–loss of insurability as individuals age. Additionally, the policies can be structured to give a break to those who buy earlier.

The possibility of not only combining such offerings but also integrating them invites intriguing possibilities. Here are a few examples:

1. Provide for LTC to be paid up or have much lower ongoing premiums than would be applicable were the LTC to be issued at the age that the CI or DI would otherwise cease.

2. Provide the same structure as in the first example, but make it dependent upon either low claims history or claim-free history in the CI or DI phase. This would remove the often fatal objection that both CI and DI are (ordinarily) “use it or lose it” offerings. In the first phase of these contracts, policy owners will not have incentive to make perhaps specious claims due to fear that, if they don’t, they’ll have paid a whole bunch of premiums and received no benefits in return.

3. One could actually provide for concurrent plans in which the total pool of money available to a client during working lifetime is defined and split evenly between CI/DI and LTC. At retirement, or a similar designated age, the pool becomes payable only as an LTC claim.

Such vehicles would need to be constructed in a way that assures the LTC premiums will be received income tax-free. (The DI or CI will be considered income tax-free in any event, as accident and health payments.)

Such vehicles need to be positioned to buyers as a simple, yet elegant and cost-effective solution to multiple buyer needs.

Sounds good, so why not design a contract like this tomorrow?

The answer is because, as with other new ventures, these approaches cry out for a well-designed feasibility study. Here are some issues insurers will need to address in that study:

1. How do we position these offerings to the agent and the customer?

2. The tax considerations are complex. We need to understand what they are and what we need to do to adhere to them.

3. (Perhaps) we don’t know anything about LTC underwriting.

4. How to minimize underwriting yet get solid and useful information about the applicant’s health, including information about cognitive impairment issues?

5. How much of a cost break can buyers get over and above the cost of these offerings when provided separately?

6. We need a business plan to define what we want to do.

The points here are but the tip of the iceberg in terms of opportunity. The value of providing two offerings together addresses an important need and offers compelling buyer value.

Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. E-mail him at .