Will a Double Dose of LTC cure slowing Annuity Sales?

I wrote my first article for InsuranceNewsNet Magazine’s September 2010 issue on the combination annuity. Now, I have been writing for quite a few years in national publications with home office and distribution channel audiences as well as for professional actuarial journals, but the amount of feedback I received on that combination annuity article dwarfs that of any previous article—and is actually continuing still today. So, given the interest in the offering, I wanted to offer Part II of the combination annuity discussion.

As you may recall, the combination annuity is an annuity that pays out a stream of benefits to cover long-term care (LTC) expenses when the annuitant meets eligibility requirements. Such annuities contain LTC provisions that define eligibility for benefits, benefit amounts, etc.

The payments came from both account value and extra risk amounts provided by the insurer. The payments are income tax-free when received. Furthermore, the gains distributed as part of the LTC benefit permanently escape taxation. This is critical because the Pension Protection Act, the law that enables this favorable treatment, allows 1035 exchanges into combination contracts. What this means is that one can legitimately escape taxation on gains in existing annuities if they are exchanged for combination annuities and the gain is then paid out as an LTC benefit. Charges for the cost of coverage are also not taxable, even if paid out of gain. Several companies have developed and introduced combination annuities already, but the next wave of offerings has yet to hit the street. One set of facts, I believe, needs to guide insurers as they move forward. These factors are critical to the success of any venture.

Among these factors is that this product will primarily be sold by annuity producers with heretofore little knowledge of long-term care. The purpose of the combination annuity will be to sell more annuities, while meeting a critical market need to provide affordable LTC coverage.

Also, the underlying annuity must be attractive in its own right. In other words, if one stripped out the LTC, producers would still want to sell it. Insurers must articulate an appropriate marketing strategy and develop a story to support it. The story must be compelling, yet relatively simple. In our view, this is a very significant investment strategy as opposed to a protection strategy, and is consequently more likely to appeal to annuity producers. Training and education are also going to be essential for the success of this offering. More so than with other annuities, all of these factors are essential. There are excellent independent vendors with fine track records. A streamlined, simplified sales (issue and underwriting) process is vital if annuity producers are going to embrace this offering. The process must include a screening component so that obviously ineligible applicants do not go through the process unnecessarily. Without the process, one will see dissatisfied customers and producers.

The process must be fast and noninvasive. (We are talking a couple of days at most.) It must provide for independent confirmation of applicant answers and a high percentage of applicants should get coverage. It is unreasonable to expect that an insurer will allow individual sales on a guaranteed issue basis. That would not be prudent and won’t happen.

Illustration tools with customized marketing presentations will enhance the perceived expertise of the producer, ensure reasonable understanding on the part of the applicant and increase the likelihood of a sale. marketing organizations also are actively pursuing development opportunities. Readers should be aware that the internal charges for providing LTC coverage are a fraction of the premiums of a comparable stand-alone product. This relationship is so favorable to the combination annuity that it makes for a decisive competitive advantage.


The competitive advantage is twofold:

  1. Affordability relative to the standalone LTC policy makes the combination annuity a compelling alternative to conventional LTC solutions.
  2. Much more importantly, the appeal of an attractive annuity in its own right, in conjunction with the combination feature, creates a compelling reason to sell the annuity.

I had a conversation with a very good friend and the topic was how to provide for LTC coverage. After we discussed the pros and cons of the alternatives, which included combination life coverage as well as combination annuities and stand-alone policies, her conclusion was strongly in favor of the annuity, for its low cost and its no use-it-or-lose-it feature (which means that the policy value will not be lost if LTC benefits aren’t paid). She also liked the idea that she would have only one transaction, not annual premium payments.

Customers, their advisors, producer organizations and companies will all profit by the combination annuity’s development, “deployment” and acceptance.

Cary O. Lakenbach, FSA,MAAA, CLU, is president andfounder of Actuarial Strategies


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