Annuity/LTC Combos: Here They Come

Simplify underwriting to protect the company without burdening the producer.

Agent training and licensing issues need to be addressed to enable the sales process. Sufficient compensation needs to be provided to incent producers to market the products. And word needs to get out to the field that combination products sold before Jan. 1, 2010 will receive favorable tax treatment after that effective date.

Solutions are on the way. Companies and wholesalers are preparing for producer education efforts. Underwriting standards and tele-underwriting techniques are being developed to reduce the burden on annuity producers and financial planners not familiar with LTC. Commission structures now in development will reward producers not only at policy issue but also, in some cases, through trail commissions that can be lucrative over time because of the long-term persistency expected on these plans.

Unique product design. The benefit payout structure under these plans is typically defined as an accelerated benefit, whereby LTC benefit payments are made from the annuity account value while waiving surrender charges. This is usually combined with some form of tail benefit payable monthly after account values are depleted (usually as a percent of annuity account value at the time of initial claim).

Example: 1/24 of the lifetime LTC benefit limit may be payable for 24 or more months from the account value, with a 12, 24, or 48 month extension of benefit "tail" as selected by the client. This creates the opportunity to convert what would have been partially taxable account values from the annuity into tax-free payouts (LTC benefits) equaling 150%-300% of account value.

There are several alternative structures, all of which combine accelerated benefits and independent benefits, but under different configurations. Certain market segments will likely find these new designs even more interesting than the tail design. There are also various ways to protect against the risk of LTC cost inflation.

Admittedly, not all consumers will actually use LTC services. But the risk of LTC utilization is sufficiently high (50% or more at ages 65 and up), and the cost versus potential benefits sufficiently compelling, that producers and companies will likely appreciate the power of combination plans.

With the new tax law reforms coming into place in 2010, this is a story that will be brought to the market. It should be fascinating to see which product designs and companies most effectively address consumer needs with these new products.

Carl A. Friedrich, FSA, MAAA, is a consulting actuary with Milliman Inc. in the Chicago offices. His e-mail address is [email protected]