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.
Overview
Currently, there are three common types of LTC combination products in the U.S. insurance market:
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- 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.
- Linked benefits that offer both acceleration riders and extension of benefits that are also governed by 7702B.
- 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.
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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:
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- Whole life
- Universal life
- Variable life
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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:
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- 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.
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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)
