Adding LTC Features To SPIAs Could Spur Greater Immediate Annuity Sales

A better definition would be one that carries with it a higher degree of likelihood that, once increased, the benefit will remain at the enhanced level. Alternatively, the definition could include a longer than usual elimination period (compared to what is found today in typical LTC insurance contracts).

Is the benefit structure effectively a per diem structure? Recall that LTC insurance benefits are typically structured either on a reimbursement or per diem basis. Reimbursement designs pay back the insured (annuitant) for expenses incurred, while the per diem policy pays a stipulated benefit as long as the covered individual remains chronically ill. Given the public demand for simplified policy structure, the latter makes more sense.

Can the benefit structure provide for inflation protection? The answer is absolutely yes, in the sense that inflation can be reflected at least until the start of the payment stream. To meet demand for simplified structure, a guaranteed renewable payment structure–where the payout amount can vary on a class basis–is not recommended. Consequently, some conservatism in the payment structure, in exchange for assured payment streams, may be in order.

What about underwriting? At least one insurer has tried issuing a combination of a (deferred) annuity and an underwritten LTC contract. The hope appeared to be that the packaging would be viewed as a positive. Unfortunately, the experience was quite poor. It is likely that a chief reason for this outcome is that financial representatives generally dont want to wait for a long, drawn out underwriting process to take its course, with the real possibility that some cases will be declined and, therefore, no commissions paid for the reps efforts. Even when such cases are approved, there is still a very lengthy wait in store before the commissions are paid.

Thus, we arrive at our recommended structure, in which SPIA policies are issued on a guaranteed issue basis. Can a company protect itself from adverse selection with such a design? The answer is most decidedly yes. We see having a no coverage period of, for example, seven to 10 years as providing the protection needed.

Can this policy be issued in a qualified plan? Legislation is pending in Congress that would allow employers to provide financial counseling services to qualified plan participants. If enacted, some observers believe employers will be under severe pressure to offer annuity options to participants, in part, to protect themselves from lawsuits should cash balances run out before the participant dies. In such a case, the natural next step is to explore whether one can structure annuity options that address contingencies other than death, such as LTC needs.

In sum, the addition of LTC to the SPIA may provide the missing ingredient needed for the SPIA business to achieve the business traction it has been seeking.

, FSA, MAAA, CLU, is president of Actuarial Strategies Inc., Bloomfield, Conn. E-mail him at [email protected].

Reproduced from National Underwriter Edition, April 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.