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Insurers Will Build Their Annuity/LTC Arsenals

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For the combination annuity and long term care marketplace, 2009 will be a momentous year.

The tax law changes in the Pension Protection Act of 2006 that make this business so attractive will take effect in 2010, making 2009 the year for insurers to build their product arsenals in preparation for the combination annuity era. (The tax changes include permission for contract values, including gain, to be paid on an income tax-free basis in suitably defined contracts.)

As early as last year, prominent industry authorities and organizations suggested, rightly in my view, that combination annuities will overtake stand-alone LTC insurance within 10 years.

What is the market potential? The answer is part qualitative and part quantitative. The latter is difficult to assess, given the lack of precedent to enable quantifying the impact of the favorable income tax treatment starting in 2010. Still, the potential should be significant. Consider the systemic evaluation within the list.

Recall that the PPA only sanctions favorable tax treatment of non-qualified combination annuities. Of the $2 trillion in variable and fixed annuity assets at the end of 2007, $874 billion in assets are non-qualified, according to the NAVA 2008 Fact Book.

As a practical matter, most of this business is sold between ages 55 and 75–the demographic most interested in LTC solutions. This is a huge potential market. Consider: by 2020, there will be 55 million Americans 65+, so, by inference, there are even more Americans alive today in the 55+ category. The age 50+ population will actually keep growing, so by 2020, it will number about 70 million, MetLife reports.

Further, Americans do need LTC solutions. Costs have been rising, and national averages for nursing home care expenses are about $6,000/month, with wide variation by geographic location. Also, financial market volatility and downright poor performance will make pre-funding of LTC increasingly attractive.

The objections of many potential customers and advisors to stand-alone LTC insurance include cost and the use-it-or-lose-it phenomenon (pay high premiums for many years and potentially receive no benefits.) By comparison, combination annuities will likely include cost-sharing provisions that will help reduce the cost, and, if the insured doesn’t use the LTC benefits, the annuity values will remain available–no more use-it-or-lose-it.

For the combination annuity to be successful, however, several conditions must be present. Clearly, enlightened designs are essential. The product development experts will see to this.

In addition, the designs will need to use an issue and underwriting process consistent with the sales culture of distribution. That sales culture, in many markets, is largely transaction-oriented, so long sales processes involving extensive underwriting won’t work. Instead, simplified underwriting that provides useful information to insurers, and which can be completed in a shortened timeframe, will have appeal.

Finally, trained wholesalers are needed, plus solid support, including illustrations that pictorially describe the benefit, and understandable written descriptions.

What is the sales potential? If only 5% of the eligible population were to buy a combination annuity, about 2.5 million people, each paying in $100,000, would have a combination annuity today. That would make it a $250 billion market. If the same number paid in only $50,000, it would still be a respectable $125 billion market.

A good part of this business would likely be new business (i.e., new annuity money, not exchange money), because the offering is simply not available with other financial instruments such as mutual funds.

Sales should become robust once reps become familiar and comfortable with the combination annuity “story,” product solution, and process.

Advisors and consumers have reacted very favorably to this new concept at focus groups. No doubt, advisors will want to steer some of their non-annuity clients to this product–because of the combination aspect. This is a very significant market opportunity. Well structured programs will enable insurer and advisors to realize the potential of that opportunity.

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