Tasked several years ago by his bosses in the Bush administration to conceptualize how a combined annuity/long term care insurance product might be structured to make it palatable to potential buyers and suppliers, Mark J. Warshawsky, then an assistant secretary at the U.S. Treasury Dept., says he had a pretty clear idea of how the product should look.
The new tool would have the chassis of an immediate annuity to provide a lifelong stream of fixed payments, plus a linked LTCI component to provide a separate stream of fixed payments in the event the contract holder was to need long term care.
But what to call it? Warshawsky, now director of retirement research in the Arlington, Va., offices of the Watson Wyatt Worldwide consulting firm, wanted a name that not only captured the essence of the instrument but also had marketability. The moniker he ultimately chose was "life care annuity." It remains to be seen whether the name will stick, but the concept of combining an annuity – immediate or deferred – with LTCI apparently is resonating enough with consumers and insurance carriers alike that the product itself is here to stay. Some experts even foresee it soon becoming a major source of new business for carriers and producers, and an important new income-generation and wealth-protection tool for consumers during retirement.
"It's going to be a very active few years in this area," says Carl Friedrich, FSA, MAAA, principal in the Chicago office of the consulting firm Milliman. "It may be five years before the market really crystallizes and matures, but I think once it does, these products are going to have a dramatic impact on production levels in the industry."
An expert on combination products who works closely with carriers on the product development front, Friedrich isn't the only industry observer who expects insurance companies to jump wholeheartedly into a market where today combination annuity/LTCI products remain relatively scarce. "I think you will see other carriers getting more serious about linking annuity products to long term care," says Beth Ludden, senior vice president for long term care product development at Genworth Financial in Richmond, Va. She says she expects the annuity/LTCI combination product to take its place alongside the stand-alone LTCI policy and the combo life insurance/LTCI policy as the most popular instruments for funding long term care needs.
Genworth is among the first carriers to offer such a product. Its Total Living Coverage annuity combines a single-premium deferred fixed annuity with what she terms "pretty robust" long term care coverage, accessible via a combined acceleration of benefits/extension of benefits rider that carries four- and six-year coverage periods (and a two-year deferral period). Carriers such as Genworth and Baton Rouge, La.-based Guaranty Income Life Insurance, which claims to have introduced the first fully tax-qualified combo annuity/LTCI contract back in 1999, are working to see that any unfamiliarity surrounding the product is short-lived. In doing so, among their most pressing tasks will be to show agents, advisors and potential purchasers how annuity-LTCI combo products work, who they are best suited for and in which situations might purchasing one be preferable to other alternatives.
The product
Today the pickings among combination annuity/LTCI products are relatively slim. Some, like Genworth's TLC, have a fixed deferred annuity base, funded by a single-premium payment. Guaranty's AnnuiCare is built on a flexible-premium fixed deferred annuity chassis. The life care annuity envisioned by Warshawsky uses as its base a fixed immediate annuity.
With AnnuiCare, explains Guaranty president John H. Lancaster, the insured pays initial benefits with annuity funds, a co-insurance feature that translates into lower premiums, whereby the insured can access benefits for about one-third the cost of a traditional qualified stand-alone plan. Benefits, from home healthcare to caregiver training, are linked to the accumulation value of the annuity. The base fixed annuity offers a return of 5 percent, says Lancaster, 1 percent of which is earmarked to cover the LTCI premium. There's a reason AnnuiCare lacks the bells and whistles common with other insurance and annuity products, he notes: "Too many options confuses agents and therefore confuses the consumer. We think simple is better."
