Insurers have been actively researching and/or developing combination (annuity and long term care) products for introduction once the Pension Protection Act takes effect on January 1, 2010.

Whether companies choose to enter this business or not, the size of the potential market suggests they ought to at least research the appropriateness of the offering for their business.

Some key issues to address follow, with the focus on issues of primary interest to marketers and distributors.

Markets: That there is a need for LTC services is incontrovertible. The number of Americans age 55 and over will, by 2010, be over 55 million, and by 2020, over 71 million (Prudential, 2008). These Americans are living longer and incurring more claims, especially related to infirmity and old age. The cost of claims is going up too. In 2008, the national average cost of a semi-private room was approximately $6,000 per month, with enormous geographical variations, especially in urban regions, according to studies by Genworth, Richmond, Va.

Given that, why aren’t sales of stand-alone LTC insurance policies more robust? Sales fell to under 300,000 for years 2006 and 2007 from the 2002 level of 725,000 policies, according to a 2008 study by LIMRA, Windsor, Conn.

Several reasons have been postulated for this, including poor publicity on existing stand-alone business; rate increases on existing policyholders; the relatively high price of existing stand-alone products; customer resistance due to the stand-alone product’s use-it-or-lose-it phenomenon; limited distribution (largely through specialists); and underwriting that is difficult and takes a long time.

Are there solutions that achieve the goal of covering the LTC need and which overcome these objections?

We don’t know the answer for sure, and won’t until next year, but the combination annuity/LTC story is a compelling one.

What makes it so appealing?

1. Much lower cost. The cost is significantly less than a stand-alone product that provides a similar benefit stream. That’s primarily because the combination product owner will be using his or her money as a co-pay, so to speak.

2. No more use-it-or-lose-it. If the owner doesn’t become chronically ill and thus doesn’t need to draw on the product’s LTC benefits, the owner gets to keep the dollars in the annuity. A properly designed annuity ought to be able to provide for living benefits without jeopardizing LTC benefit levels, so that some values can be used to provide income. Remaining values can be passed along as a death benefit. In other words, no more use-it-or-lose-it. This is bound to appeal to investment-oriented advisors.

3. Gains avoid tax. Annuity dollars paid out for LTC benefits are not taxable, even if the contract dollars represent gain. This is especially valuable if gains exist due to exchanges.

4. Simplified issue and underwriting process. A simplified yet still rigorous underwriting can be designed that is protective and yet also enables the transaction oriented annuity producer to sell this product.

Distribution: The real opportunity, as viewed by many observers, exists with annuity producers.

Annuity producers are transaction-oriented, so maintaining the transactional nature of the sale is essential. The keys to achieving this objective are design and the contract issue and underwriting process.

Market research carried out by my firm strongly suggests that advisors from various distribution segments, including wirehouse and regional broker-dealers, are comfortable with simplified underwriting. This is provided that the underwriting process meets certain criteria, such as limited time until decision and minimal producer involvement.

Educating the producer on the type of customer that would be suitable for the combination LTC/annuity is viewed as very positive.

Proper training and attractive tools are essential. If the insurer is larger, training wholesalers to educate their advisors properly is essential. Smaller insurers may want to sponsor schools, develop training disks, and sponsor training webinars.

Another finding from the research: Use illustrations that illuminate design and are accompanied by attractive professionally written material.

In sum, a well-prepared company will much more likely be a successful company. A solid understanding of existing markets, market opportunities, and an appropriate sensitivity to the needs of annuity distribution are key factors in the successful execution of a combination annuity/LTC business strategy.

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