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Using Combination Products In Income Scenarios Might Be The Next Wave

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It’s been interesting to see the industry dialogue about income products evolve over the last 5 years.

At the beginning of this period, immediate annuity discussions seemed to focus on “When will these take off?” or “Don’t demographics mandate these being a future hit?”

In the last 2 years, the industry has instead embraced the concept of marketing “retirement products,” including both products that help save for retirement and those that distribute income. Immediate annuities play a significant role in this push, but have become part of a holistic solution rather than a stand-alone one.

In another recent development, combination products have become a popular topic in the life insurance industry. Most often these combine some sort of long term care benefit inside a base life insurance or annuity product.

Given the interest in LTC-oriented products, it would be interesting to explore the possibility of creating combination products focused on income–thereby merging 2 recent trends. Such a combination raises a few questions, as follows:

1) Does the concept of the combination product apply to income solutions?

For instance, would there be a market for a life insurance product that offered a cash surrender value but also provided a secondary, higher value only accessible through some sort of life income? One could see a situation where the surrender value available in cash would be lower than that offered on products not having the income option (one-tiered), while the value available through life income would be higher than the cash surrender value on a one-tiered product.

Would the market embrace this feature? Is there marketing play in having life insurance until retirement and then income thereafter (rather than a pot of cash surrender value that can be used in a variety of ways, including income)?

From an insurance company standpoint, does this lengthen duration of the contract such that it can offer increased value to customers when compared to the one-tiered product?

2) What about income as an option in participating whole life insurance?

A second possible form of combining income with a life insurance product would be in participating whole life insurance. With the myriad dividend options available in these products, a carrier might decide to offer deferred income as a use for policy dividends. Again, these income purchases could be deferred to different ages and may or may not have the ability to be cashed out.

As always, limiting the ability to cash out the deferred income purchases offers the greatest potential to offer more income to the purchaser.

3) Other than products from life insurers, what other sorts of combination products are available?

Outside the life insurance arena, some retirement plans are already offering income purchase as an investment option inside qualified plans. Many of these are likely income purchases deferred to a “normal” retirement age like 60 or 70 (with or without cash surrender options), but it is conceivable that such purchases could be for deferrals to a much later age (with no cash surrender).

4) What about combining other income products?

Longer deferrals with no cash surrender lead naturally to longevity insurance, trading premium dollars today for income that may not start for several decades.

Often these products have little or no cash surrender value or death benefit, instead allowing maximum leverage of interest discount and survival rates to yield the largest possible deferred income per dollar of premium. Despite their alluring pure insurance aspects, these products can be a tough single premium sale, as attractive theories (leveraging interest discount and survival) bump up against the reality of spending today’s premium dollars for a seemingly far-off benefit.

It may be, then, that a combination solution (like the dividend option described above) is an attractive means for weaving longevity insurance into the insurance industry’s retirement fabric.

Given the creative minds that are behind the marketing of life insurance and annuity products, numerous themes and variations will likely arise to facilitate sale of income products in the coming years. A new wave of combination products may be among those that come to shore.

Robert P. Stone, FSA, MAAA, is an actuary and consultant with Milliman, Inc. in the Indianapolis office. His e-mail address is [email protected]