It's crept onto your restaurant menu, into your pocket and your retirement portfolio, too. It's called hybridization—taking distinct elements of one item and combining them with distinct elements of another to yield another distinct multifaceted product. Use that recipe in the culinary world and you get fusion food. Use it in the high-tech arena and the result is an all-in-one device called a smartphone. Apply it to financial and insurance instruments, and to annuities in particular, and the possibilities are seemingly endless.
The drive to innovate and deliver versatile solutions that address multiple client needs has put annuity providers in full hybridization mode. From the structure of the contract chassis itself, on down to other, more granular aspects of their products, insurers are borrowing and blending elements of various insurance and financial instruments to put a unique spin on their annuity offerings.
"Really what they're doing," explains Tim Hill, FSA, MAAA, principal and consulting actuary in the Chicago offices of Milliman, an actuarial consulting firm that provides insurance companies with product development guidance, "is mining these features from other things and using them with annuities. That approach seems to rule the annuity marketplace today."
The result is an influx of specialized, sometimes complex products with hybrid structures, hybrid compensation models, hybrid benefits, even hybrid hedging strategies.
For advisors, this proliferation of hybrid annuity products and features means having a wider range of potential solutions to offer clients. But it also means more product education, observes Hill's colleague Carl Friedrich, FSA, MAAA, also a principal and consulting actuary at Milliman. "There's a real learning curve [annuity producers] need to climb when they're working with some of these [hybrid] products."
Is it time you climbed that learning curve? To what extent might the current generation of hybrid products and features benefit your annuity book of business and your client base? Read on, then judge for yourself.
The Combo
The annuity/long-term care (LTC) insurance combination is one of the more entrenched annuity hybrids, though it remains a niche product. Typically built on a fixed immediate annuity chassis, this class of hybrid is designed to capitalize on provisions in the Pension Protection Act of 2006 that give tax-free status to distributions from combination annuities used to cover long-term care costs, and another that permits owners of life insurance and annuity contracts to move into a combo annuity via a tax-free 1035 exchange (benefits that apply only to non-qualified annuities).
The Long-Term Care Advantage rider offered by Lincoln National is among the most innovative and robust in its class, says John McCarthy, product manager, advisor software, annuity solutions, at Morningstar Inc. in Chicago. It pays a monthly amount for long-term care expenses up to three times the initial purchase amount. The benefit costs between 0.87 percent and 1.71 percent, depending on the options chosen, is capped at $1.6 million, covers a single life and applies only to non-qualified assets.
Some insurers lately have taken hybridization a step further with their annuity-long-term care combos, notes Friedrich, by introducing a product that offers couples joint LTC coverage. Combo LTC-annuities tend to resonate with clients who lack LTC coverage and who either don't want to purchase or can't affordably purchase a stand-alone LTCI policy.
Despite the tax and leverage benefits, LTC-annuity combos have been slow to find acceptance among distributors, advisors and investors alike, Friedrich says, largely because of the low-interest-rate environment and the learning curve. "It's still very early in the lifecycle of this product," he adds, so there's still time for growth.
