Annuity/LTC Combos: Recipe For Success

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.