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Retirement Planning > Retirement Investing > Annuity Investing

Getting the best of both worlds

By David Port

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Tasked several years ago by his bosses in the Bush administration to conceptualize how a combined annuity/long term care insurance product might be structured to make it palatable to potential buyers and suppliers, Mark J. Warshawsky, then an assistant secretary at the U.S. Treasury Dept., says he had a pretty clear idea of how the product should look.

The new tool would have the chassis of an immediate annuity to provide a lifelong stream of fixed payments, plus a linked LTCI component to provide a separate stream of fixed payments in the event the contract holder was to need long term care.

But what to call it? Warshawsky, now director of retirement research in the Arlington, Va., offices of the Watson Wyatt Worldwide consulting firm, wanted a name that not only captured the essence of the instrument but also had marketability. The moniker he ultimately chose was “life care annuity.” It remains to be seen whether the name will stick, but the concept of combining an annuity – immediate or deferred – with LTCI apparently is resonating enough with consumers and insurance carriers alike that the product itself is here to stay. Some experts even foresee it soon becoming a major source of new business for carriers and producers, and an important new income-generation and wealth-protection tool for consumers during retirement.

“It’s going to be a very active few years in this area,” says Carl Friedrich, FSA, MAAA, principal in the Chicago office of the consulting firm Milliman. “It may be five years before the market really crystallizes and matures, but I think once it does, these products are going to have a dramatic impact on production levels in the industry.”

An expert on combination products who works closely with carriers on the product development front, Friedrich isn’t the only industry observer who expects insurance companies to jump wholeheartedly into a market where today combination annuity/LTCI products remain relatively scarce. “I think you will see other carriers getting more serious about linking annuity products to long term care,” says Beth Ludden, senior vice president for long term care product development at Genworth Financial in Richmond, Va. She says she expects the annuity/LTCI combination product to take its place alongside the stand-alone LTCI policy and the combo life insurance/LTCI policy as the most popular instruments for funding long term care needs.

Genworth is among the first carriers to offer such a product. Its Total Living Coverage annuity combines a single-premium deferred fixed annuity with what she terms “pretty robust” long term care coverage, accessible via a combined acceleration of benefits/extension of benefits rider that carries four- and six-year coverage periods (and a two-year deferral period). Carriers such as Genworth and Baton Rouge, La.-based Guaranty Income Life Insurance, which claims to have introduced the first fully tax-qualified combo annuity/LTCI contract back in 1999, are working to see that any unfamiliarity surrounding the product is short-lived. In doing so, among their most pressing tasks will be to show agents, advisors and potential purchasers how annuity-LTCI combo products work, who they are best suited for and in which situations might purchasing one be preferable to other alternatives.

The product

Today the pickings among combination annuity/LTCI products are relatively slim. Some, like Genworth’s TLC, have a fixed deferred annuity base, funded by a single-premium payment. Guaranty’s AnnuiCare is built on a flexible-premium fixed deferred annuity chassis. The life care annuity envisioned by Warshawsky uses as its base a fixed immediate annuity.

With AnnuiCare, explains Guaranty president John H. Lancaster, the insured pays initial benefits with annuity funds, a co-insurance feature that translates into lower premiums, whereby the insured can access benefits for about one-third the cost of a traditional qualified stand-alone plan. Benefits, from home healthcare to caregiver training, are linked to the accumulation value of the annuity. The base fixed annuity offers a return of 5 percent, says Lancaster, 1 percent of which is earmarked to cover the LTCI premium. There’s a reason AnnuiCare lacks the bells and whistles common with other insurance and annuity products, he notes: “Too many options confuses agents and therefore confuses the consumer. We think simple is better.”

Genworth’s TLC annuity is only slightly more complicated. Besides a fixed rate of 3 percent and common annuity features such as return-of-premium (at death only), free withdrawals (up to 10 percent of account value) and a no-lapse guarantee, the annuity’s LTC rider includes ingredients common to many stand-alone LTCI products, including inflation step-ups (3 percent or 5 percent), benefits for home care and couples discounts. Funds to cover the cost of the rider are drawn from the assets of the annuity. Genworth, which launched the TLC annuity in 2006 on a pilot basis in a handful of states, plans to roll it out nationally in the fourth quarter of this year, according to Ludden. “It’s a product that’s been very challenging to get regulatory approvals on. Not only is it new to regulators, it’s new to distributors and it’s a new consumer audience as well. But the feedback we’ve gotten around the concept has generally been very positive.”

While the chassis for AnnuiCare and TLC is a deferred annuity, the life care annuity envisioned by Warshawsky would take a single premium payment and use it to purchase an immediate annuity that provides lifetime income, plus additional regular fixed payments in the event the contract holder needs long term care.

The market takes shape

An advisor’s first instinct upon being introduced to an unfamiliar product is to cut to the chase: What can it do for my clients and what makes it a sellable product? In most cases, the salient sales points are:

  • Lower cost dollar-for-dollar relative to stand-alone LTCI. “The advantage this product gives consumers is the ability to leverage their dollars by as much as two to three times,” says Ludden.
  • Minimal underwriting.
  • No reduction in contract value when claims are funded via an extension of benefits LTCI rider.
  • Ongoing access to funds, absent an LTC claim.
  • The future availability of tax breaks.

Life care annuities, according to Warshawsky, are geared mainly toward people in the 65-75 age bracket who have available a lump sum to cover the upfront premium for the product. That sum needn’t be huge but must be significant enough to garner adequate long term care coverage. “We’re talking about a solid middle- to upper-middle-income market,” he says. Still, at least with a product like AnnuiCare, a person must have the financial means to self-insure LTC for a period of time.

A person who has a significant chunk of money in a low-return, liquid rainy-day fund (such as a CD, money market or savings account) might find appeal in a combo annuity/LTCI product, says Ludden. “Once the agent finds that stash, it’s a matter of saying, ?Let me show you how to take that money and increase it by at least two times what you have now. You still will have access to those funds and the money will be there to cover any long term care needs you may have.’”

Such a structure also addresses consumer concerns about paying premiums for an LTCI policy they may never use. If over the life of the contract no funds are used for LTC, the owner of the contract retains access to values within the annuity.

People who cannot afford, are reluctant to pay for or have health issues that prevent them from qualifying for a stand-alone LTCI policy are good candidates for an annuity/LTCI combo product because the premiums tend to be much lower and the product generally comes with few underwriting requirements (unlike many life insurance/LTCI combo products). “It’s intended for people in a wide range of health situations,” says Warshawsky. And, Ludden points out, less underwriting means a much shorter approval process, thus shrinking the window for buyer’s remorse.

If consumer response to the annuity/LTCI combo is as strong as carriers expect, not only are more companies likely to bring similar products to market, they also are apt to introduce new features to go with them. The next combo generation might include products with a variable annuity base, Ludden suggests, while Warshawsky envisions the life care product being offered as part of employee retirement plans.
Until then, there’s also the small matter of settling upon a name for the product. Will it be popularly known as a life care annuity, a combination or hybrid product, as Friedrich refers to them, or a linked benefits product, as the folks at Genworth call them? Someday soon one of those might be a household name in the insurance and annuity markets.

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