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Meeting the needs of the middle market with combination products

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The US life, annuity and long-term care (LTC) industries are facing a number of disruptive forces, from macroeconomic changes and demographic shifts to rising consumer expectations. Carriers are responding by changing their business models, modifying sales distribution practices, digitizing core processes and functions, and upgrading their risk management capabilities.

In addition, there is an effort to stimulate revenue growth with innovative products that address industry issues and meet the enormous consumer need for LTC services and support. Among the products that have gained significant traction in the insurance industry are combination products, which combine base life or annuity policies with LTC riders

This article will examine the rise of combination products, why they have enjoyed considerable growth in recent years and possible future developments in this increasingly important market.


Currently, there are three common types of LTC combination products in the U.S. insurance market:

          1. LTC riders or acceleration riders (governed by IRS tax code section 7702B). These products reimbursed LTC expenses through the advancement of death benefits if the claimants meet the basic definition of chronic illness.
          2. Linked benefits that offer both acceleration riders and extension of benefits that are also governed by 7702B.
          3. Chronic illness riders that accelerate the base life policies (governed by IRS tax code session 101g). These products pay indemnity LTC benefits through the advancement of death benefits if the claimants meet the definition of chronic illness. However, they cannot be marketed as LTC benefits.  

All three of these products accelerate the cash value and the death benefit of a life insurance policy or annuity policy to cover LTC expenses. Extension of benefits continues the LTC benefits after the base policy value is exhausted.

More than 20 carriers offer life combination products. The three common “chassis” are:

          1. Whole life
          2. Universal life
          3. Variable life

The number of carriers offering life/LTC combination products continues to grow amid the popularity and influx of chronic illness riders, and thanks to new market entrants to linked benefits. Five carriers offer annuity combination products. While the annuity combination product market is currently underserved, many industry observers expect to see new market entrants as interest rates rise.

Recent sales rates of combination products have surpassed other insurance products. A 2015 LIMRA study indicated that policy sales increased by 37 percent over 2014 and new premiums increased by 14 percent. Total new premiums in 2015 were $3.1 billion from 200,000 policies.  These numbers are a continuation of the sales momentum from the past five years. 

There was other positive sales news from the LIMRA study:

          • LTC riders, which account for 28 percent of the combination product market, recorded a growth rate of 51 percent.
          • Chronic illness riders, which account for 59 percent of the combination product market share, recorded a growth rate of 38 percent.
          • Extension of benefits recorded a growth rate of 11 percent.

The momentum continued throughout 2016, and combination products were at the top of the agenda at recent industry meetings. Carriers are actively considering how combination products can add economic value to their product portfolios and meet a clear market need. 


Combination products are expected to continue to grow and evolve to meet consumer needs. (Photo: iStock)

Why combination products are growing

Combination products offer a number of features and characteristics that make them appealing to carriers:

          • Combination products first pay out LTC benefits from the person’s own policy account value, reducing carriers’ financial risks during the acceleration period.
          • Most of the products in the market today are funded by single premium, which enables carriers to better manage investment risks and lapsing behavior by insureds.
          • Benefit options are limited for combination products, which usually allow for limited LTC benefit options and coverage. 
          • If properly underwritten, the anti-selection risks can be significantly reduced compared to stand-alone LTC policies.  
          • Lastly, many of the key pricing risk factors for the riders and the base policy offset each other when the base policies and the riders are combined.  

All of these factors make combination products less likely to be subject to rate increases. This natural risk hedging, along with a number of other financial characteristics, will continue to attract carriers’ attention to the products.

Advisors and brokers may expect continued growth of combination products in the following areas: 

          • Linked products with meaningful LTC benefits will continue to attract high-income consumers.  
          • Chronic illness riders will continue their growth momentum. These types of riders can’t be marketed as LTC and are exempted from a number of LTC regulatory requirements, including agent training and education requirements. Yet they still provide meaningful LTC benefits. Adding chronic illness riders helps to increase the marketability of base policies. 
          • Products that are affordable to middle-market consumers are also expected to gain traction. For example, products with features such as a lower face value or flexible premium options will help address the affordability concerns.    

Bottom line: more growth on the horizon

The growth of combination products reflects strong market demand. Their continuing evolution will be guided by consumers’ changing needs across different market segments. The fact that these products also offer features and financial characteristics that appeal to carriers and agents is likely to extend their momentum.

In the big picture, combination products will remain a niche in the entire insurance portfolio, but their relatively narrow specialty is expected to continue to provide compelling growth in the immediate and intermediate terms. Much of the growth will be attributed to the under-penetration of the middle market, assuming the industry can effectively position combination products to take advantage of latent demand.

Flexible premium products are definitely gaining attention as a result. Combination products will continue to play an important role as part of ongoing LTC reform and contribute to the growth of the insurance industry. 


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