Life insurance
used to revolve around providing coverage for heirs, with products
triggered at the time of death. Increasingly that formula is
changing, with insurers inventing new ways to help clients while
they are still alive.
Living benefits, which
emerged in the US as little more than benefit accelerators that
enabled policyholders to tap into the assets accumulated in a life
product, have grown in recent years to tap into cash values in
tax-efficient ways, even for guaranteed income for life.
Go deeper with GlobalData
There are two types of living
benefit guarantees. The first is a capital guarantee typically
found in investment or pension plans to protect the capital value
from volatility in the markets. The second is an income guarantee
within a pension drawdown plan protecting income payments from
equity volatility and the risk of living longer than
expected.
Milliman’s annual Guaranteed
Living Benefits survey of leading US variable annuity carriers
provides a useful look at the growth of the riders. The percentage
of VA sales that offered an optional living benefit rider increased
from a median of 75% in 2006 to 95% during the first half of
2010.
Living benefits have grown in
popularity because they provide the potential for future growth,
income flexibility and a lump-sum death benefit option. Investors
can invest in a diversified portfolio of investments with the
benefit of growth potential but with the security of a guarantee if
there is a stock market crash. The guarantees normally increase if
future fund performance is above a certain level.
Insurance companies provide
the guarantees through sophisticated hedging techniques using a
wide range of derivatives to ensure that they can always meet their
contractual guarantees.
With the federal estate-tax
exemption now up to $5m from $3.5m in 2009 and the spectre of
increased personal income tax rates on the horizon, policyholders
can be lured by the prospect of fully funded survivorship universal
life policies, with a goal of using the cash value for tax-free
retirement income.
The policyholder can first
use the cost basis for withdrawals, and then later in life switch
to loans against the policy. The insurer helps to project a level
amount of withdrawal that does not threaten the vitality of the
policy.
If the estate tax exemption
is lowered after 2012, buyers would still have the option of
preserving the full death benefit by putting the policy into an
irrevocable life insurance trust as a way of keeping the benefit
out of their estates.
A number of US insurers have
expanded their living benefits offerings this year. In March, The
Hartford introduced its Longevity Access Rider, which provides
guaranteed income for eight years or more to policyholders who
reach age 90.
The monthly income can be up
to 1% of the death benefit. Should the insured withdraw the full
benefit, beneficiaries still receive a residual death benefit. The
longevity rider expands upon The Hartford’s LifeAccess Accelerated
Benefits, a rider the company introduced in 2007 that provides
tax-free withdrawals to help with the costs of becoming chronically
ill.
Consumers can use income from
the LifeAccess Accelerated Benefit Rider for whatever they want,
including paying family or friends to provide them with home
care.
The Hartford was recently
awarded a patent for the life-insurance rider, which allows a
policyholder to use the insurance plan like a reverse mortgage to
fund expenses related to chronic illness.
Vermont-based National Life
Group last year became the first US life company to offer an
indexed universal life product with a lifetime income benefit
rider. The amount of the guaranteed income depends on contract
value, and the death benefit stays in force but may decrease. The
company makes the periodic payment from the policy’s cash value
based on the life expectancy of the insured.
The guaranteed income is
tax-free until the cash value is exhausted, and there is no cost
for the rider until the policyholder triggers the income
stream.
Pruco Life Insurance, a
subsidiary of Prudential Financial, has organised its living
benefits offering in a workplace theme. Its PruTerm WorkLife 65 is
a term life insurance product designed to provide coverage
throughout the client’s working years and to keep the insurance in
place by waiving premium payments in the event of unemployment or
disability.
The product is available to
persons 25 to 55 years old, thus providing up to 40 years of
coverage, and it can be converted before age 65 to any Prudential
permanent insurance product without additional medical
testing.
“The reality for most
Americans is they may be out of a job at some point during their
working careers or they may not be able to work because of a
disability,” said Mark Hug, chief marketing officer at the
Prudential Insurance Company of America’s Individual Life Insurance
business, in a release.
“When money is tight, the
ability to keep paying life insurance premiums may not be an
option. Losing coverage can have devastating results for families
already in difficult financial circumstances. This product sets out
to help families keep their insurance coverage in place when they
may need it most.”
To help manage risk, that rider waives premiums for one
year. The disability waiver of premiums remains in effect until the
insured recovers or the policyholder turns 65. It’s a remarkable
sales proposition for working adults, one sure to drive sales of
the underlying life coverage as an increasing number of Americans
wrestle with increased longevity and the reality of healthcare
costs.
