Three economists have gone into a virtual financial lab and come out with an idea for a new product: a health shock annuity feature.
The product, which they call a "refinancing enhanced annuity rider," or REAR, could help ease the fears of retirement savers who like the idea of annuitizing their assets, and getting a lifetime stream of income, but who wonder what they would do if they suffered a stroke, heart attack or dementia and had a big, sudden need for cash.
The product would combine a conventional single-premium immediate annuity with a REAR feature.
The rider would give an annuity owner who faces a life-expectancy-reducing health catastrophe an option to use the SPIA reserves to buy a new, "substandard" annuity.
The substandard annuity would be designed for someone in poor health, with a short life expectancy, and it would pay a much higher level of income for the rest of the annuity owner's life.
The economists note that the REAR product feature is a response to economists' decades of discussions about how to overcome consumers' fear of annuitization and low levels of annuitization.
What it means: Researchers are still thinking about new ways to help clients manage long-term care risk.
The authors: Colin Ramsay, an actuarial science professor at the University of Nebraska, described the idea together with Victor Oguledo and Annika Krutto in a paper published behind a paywall in a recent issue of the North American Actuarial Journal.
The history: In 2023, Ramsay and Oguledo published a paper about a long-term care annuity that would complement state Partnership for Long-Term Care programs.
Partnership programs encourage people to buy private long-term care insurance by giving LTCI owners who exhaust the benefits in eligible LTCI policies a chance to get Medicaid nursing home benefits on relatively easy terms.
That product, a doubly enhanced Medicaid partnership annuity, or DEMPAN contract, would combine an annuity with a long-term care rider that was tailored to complement a Partnership program LTCI policy.
The adverse selection problem: One enemy of a wide variety of LTC finance arrangements is that people tend to know more about their odds of needing long-term care than insurance companies do.
The REAR feature team believes it has come up with a solution for the risk awareness problem.
"To prevent adverse selection, a REAR must be purchased before the start of the annuity's decumulation phase," or the period when the contract owner begins taking cash out, the economists write.
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