Annuities and long-term care insurance seem like a natural pairing — the insurance equivalent of chocolate and peanut butter. When the Pension Protection Act's (PPA) changes for these hybrid (or linked) annuities took effect in 2010, it appeared this market was poised for rapid growth. But while some advisors and insurers have experienced solid sales of these products, others report that the expected sales growth hasn't materialized for several reasons. Nonetheless, advisors, industry consultants and insurers believe that the product's potential is undiminished and that sales eventually will increase.
Mixed sales results
OneAmerica has experienced "double-digit growth" with its hybrid annuities since 2009, according to Chris Coudret, executive vice president with OneAmerica Care Solutions in Indianapolis, Indiana. He notes that the company's internal research and information received from LIMRA indicate the company has sold "just a little over 80 percent of the premium in that marketplace since 2009."
Debra Newman, CEO of Newman Long Term Care in Richfield, Minnesota, reports that most of her agency's hybrid annuity sales come from bank affiliates that are primarily moving customers out of certificates of deposit. In contrast, she notes, there is much more interest and activity in the hybrid life products. Scott Boyd, vice president of long term care at National Benefit Group in West Des Moines, Iowa, has seen similar results. He estimates that his agency produces approximately six times as much hybrid life as hybrid annuity business. He cites several reasons for that imbalance, including his view that hybrid life offers qualified applications more value for their premiums. "When I'm in consultation with an agent about their clients, I'm going to steer them toward the life with LTC most often because of the fact that the ultimate objective is to create the most amount of leverage and long-term care benefits I can off the amount of money they're putting in there," he says.
Market challenges
Several advisors cite a scarcity of product as a reason for their low hybrid annuity sales. That condition could be partly attributable to the regulatory hurdles insurers must overcome in getting products approved by state regulators. Dan Herr, vice president, annuity product management at Lincoln Financial Group in Hartford, Connecticut, describes that process as "long and arduous." To date, Lincoln Financial has completed the process in about 30 to 40 states, he estimates.
A lack of clarity on hybrids' tax treatments can be an issue, as well, says Carl Friedrich, principal and consulting actuary with Milliman in Bannockburn, Illinois. The PPA provided "a lot of clarification," he says, and it "covered most of the major issues, including the fact that benefit payments from those contracts are generally tax-free long-term care benefits." But he notes there is still a gray area around the impact on a contract's basis when long-term care (LTC) benefits are paid out because an IRS private letter ruling said that the LTC benefit payments reduce the basis. That ruling appears to be contrary to the law's intent and the American Council of Life Insurers has asked for clarification and is currently awaiting an IRS response.
Advisors' attitudes can be another stumbling block to selling hybrid annuities, says Chris Conklin, senior vice president of product design at Genworth Financial in Richmond, Virginia. States impose additional licensing requirements to sell LTC. Many states also have LTC license continuing education requirements that must be satisfied every few years, which can put off some advisors, he says. Some advisors are uncomfortable dealing with the underwriting process, as well, he believes. Agents who sell annuities want to talk to customers about protecting and growing their money and eventually converting it to income. Consequently, they typically don't talk about long-term care expenses or insurance with clients. A related problem: The underwriting standards with some hybrid annuities can lead to an applicant's rejection, a result advisors prefer to avoid. "The fact that these type of features typically have an underwriting process that rejects some applicants is a real challenge when it comes to reaching the annuity customer because annuity agents are simply not comfortable with an underwriting process," he says.
Insurers can recognize the impact of underwriting and can attempt to facilitate the application. Herr says Lincoln Financial Group uses "self-underwriting" with its fixed and variable hybrid annuities. Instead of having applicants go through a medical exam or have a cognitive screen, the initial inquiry uses a series of medical questions and a prescription drug screen, which is done behind the scenes. "The clients and their advisors can look at the medical questions and the list of prohibitive prescription drugs and understand whether they're going to qualify or not before they even apply for the benefit," he explains. "That self-underwriting is really meant to be more transactional so that you'll know you can't qualify for the business before you ever apply."
