Combination plans featuring life insurance or annuities coupled with long-term care benefits have been a hot topic in industry conferences in the past year, particularly since enactment of the Pension Protection Act of 2006. But a successful launch of such products can pose some difficult challenges.
By their nature, combination plans have complexities that typically exceed those of stand-alone policies. A number of insurers entering this market are therefore choosing to simplify their plan designs.
Yet simplicity comes with trade-offs, which may include higher prices, product solutions not fitting individual consumer needs, or markets precluded due to failure to meet certain regulatory requirements.
Currently, common LTC structures on life insurance include accelerated death benefits (ADB), which may be the only LTC feature on some plans, or additional independent benefits offered via extension of benefits (EOB) riders that extend coverage when ADB payments are exhausted. The EOB benefit adds risk to the company and complexity to the product, and increases cost to the consumer, but it does a much better job of rounding out consumer need for LTC insurance.
If a company wants a product to feature tax-qualified (TQ) LTC benefits, various federal requirements must be met. When EOB is present, these include offering inflation benefits and nonforfeiture benefits, and for all LTC plans, other mandates that add to cost and complexity. But the TQ design does allow for the LTC benefits to be treated as tax-free health insurance benefits, and effective Jan. 1, 2010 (per PPA), the charges for a TQ LTC rider will not be treated as taxable distributions.
In the life/LTC arena, it is common for the carrier to add a supplemental LTC application so it can underwrite the risks uniquely relevant to LTC. In addition, there may be requirements for attending physicians' statements, telephonic interviews, or face-to-face geriatric assessments–which may add to the complexity of the underwriting process, yet allow for better control of risks and thus more affordable rates.
Underwriting is a much greater challenge when coupling annuities with LTC. No underwriting is the norm in the annuity world. But offering meaningful LTC benefits without some type of underwriting can lead to anti-selection.
Techniques exist that can partially address these risks–e.g., requiring a lengthy waiting period before LTC benefits become available. However, these solutions are generally imperfect, and the insurer often needs to load up rates for the anti-selection risk. Introducing a simplified LTC health questionnaire would help here by narrowing the risks; following up with a telephonic interview would help, too. But training annuity agents for the unfamiliar underwriting process is a major task.
