2013: The year of the hybrid

Randy Rowray has been around the life insurance business long enough to sense when a product is on the verge of a breakthrough. And based on the surge in interest he’s seeing from advisors and consumers alike, Rowray, vice president of marketing at The National Benefit Corp. (TNBC) in West Des Moines, Iowa, says a class of hybrid products that combine life insurance with long-term care (LTC) coverage “could truly be a hot button for 2013.”

The momentum behind life/LTC combination products has grown so much of late that TNBC, an annuity- and life insurance-focused brokerage agency, is set to make these often-overlooked products the centerpiece of a 2013 marketing and educational campaign aimed at its roughly 8,500 reps and advisors nationwide. “It’s a topic on a lot of advisors’ minds,” says Rowray.

Life insurance/LTCI isn’t the only hybrid product generating a buzz these days. Indeed, several annuity and life (LI) offerings that insurance carriers have developed by borrowing familiar elements from other instruments appear to be gaining traction. Want to press the right buttons with your clients? Here’s a look at half-dozen hybrids worth your due diligence in 2013.

HOT HYBRID ANNUITIES

Deferred income annuities. Combine a deferred annuity with an income annuity and the resulting hybrid is what’s often called a deferred income annuity (DIA), also known as a longevity annuity, longevity insurance and even oxymoronically as a deferred immediate annuity.

Whatever the moniker, the product is resonating with consumers. With new companies entering the market and existing players launching new or revamped products, sales of DIAs reached $395 million in the first quarter, a leap of 147 percent above the first quarter of last year.

In some regards the product works like a single-premium immediate annuity, where the contract holder invests a lump sum, either by rolling over qualified funds or taking money from a low-earning CD. But rather than starting immediately, annuity payments are deferred for a minimum period of time, such as five, 10 or even 20 years, after which the contract holder typically has the discretion to begin taking payments or to continue deferring them. Thus it functions like a pension, providing a steady, guaranteed stream of retirement income. “People want to know where their retirement income will come from,” says Kevin Loffredi, vice president for insurance custom solutions at Morningstar, Inc., in Chicago. “[The DIA] answers that question very succinctly for them.”

New York Life’s Guaranteed Future Income Annuity is among the leaders in the DIA segment. It’s a flexible premium product that can be purchased with an initial premium as low as $10,000. It also allows policyholders to defer or accelerate their income start date.

The single-premium Select Portfolio DIA from Northwestern Mutual offers a new twist — the opportunity for contract holders to collect a nonguaranteed dividend based on the performance of sub-account investments. That dividend can be taken as additional income or reinvested inside the contract, or a combination of both. Income can be taken following a 13-month deferral period or decades in the future.

Annuity + LTC hybrids. They may not match the popularity of their life/LTC cousins, but annuity/LTC combination products are nonetheless finding a niche in the marketplace, according to Loffredi.

Usually built around a fixed immediate annuity chassis, annuity/LTC products gain appeal from their tax-favored status (distributions from combination annuities used to cover LTC costs are tax-free if handled properly), plus their ability to provide a measure of long-term care coverage to people who either don’t want to purchase or can’t affordably purchase a stand-alone long-term care insurance policy.

Companies such as TransAmerica offer variable annuities with living benefit riders (such as the Retirement Income Choice 1.2) that feature accelerated benefit options to cover LTC costs. Loffredi also points to the Long-Term Care Advantage rider from Lincoln National for its unique structure. For a cost of between 0.87 percent and 1.71 percent, the rider pays a monthly amount for long-term care expenses up to three times the initial purchase amount, up to $1.6 million.

Hybrid dual-sleeve annuities. This hybrid of the variable annuity (VA) and the traditional fixed annuity features a dual-sleeve design, where the contract holder can purchase units of a variable annuity and units of a fixed annuity. AXA Equitable’s Retirement Cornerstone is among the new breed of products to take such an approach. It features a nonguaranteed equity-invested variable sub-account and a fixed sleeve that houses guaranteed investments to support the contract’s optional income and death benefit guarantees. When the contract holder decides to have the guarantee kick in, funds are allocated into the guaranteed sleeve.