Despite their inherent complexity, long-term
care/annuity combinations are gaining momentum in the US. A
long-term care (LTC) rider married to an annuity product can help
overcome middle-class fears of full-blown LTC policy costs,
resulting in a product that appeals to a broader sector of the
market than ever before.
US consumers are deeply concerned about the
long-term-care issue, but questions persist as to the cost
effectiveness of the full LTC product. An LTC rider attached to a
life policy, or in combination with an annuity, offers a
middle-of-the-road approach.
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With more Americans than before funding part of their retirements
through private investments, the appeal is simple: insurance can
protect an investment portfolio from being decimated by unexpected
events, such as health care costs for older clients or, for younger
clients, a disability that reduces or eliminates income. Add the
reality that many middle-aged families are managing the late
retirement years of their parents, and the LTC product gains even
more appeal.
A long-term care rider fits neatly within a variable annuity’s
(VA) living benefit rider, allowing the insurer to define the total
risk of the policyholder outliving their income and find the most
efficient and cost-effective way to reduce that risk. A client’s
longevity, annual withdrawal rates and investment returns are not
the only variables that affect the probability of outliving one’s
income.
Adding an LTC to variable annuities (VAs) is not exactly new:
insurer John Hancock has offered CARESolutionsPlus, also called the
Accumulated Value Enhancement rider, on certain VAs for several
years now. Subject to age and state restrictions, the rider –
available for an additional 0.35 percent annual charge to account
value – increases the account value by 1 percent of the initial
premium each month for the duration of a qualifying long-term care
event and increases 5 percent for each year of contract ownership
up to the seventh year. The total value of the enhancement is
capped at $300,000.
The LTC benefit amount is accessible without penalty, but it
remains in the deferred VA until needed. Since LTC premiums can now
be paid from earnings in a VA contract, the benefits paid by the
coming generation of LTC riders may look more like traditional LTC
insurance benefits, but they should be somewhat cheaper through
actuarial offsets driven by combining LTC riders with benefits
predicated on longevity risk.
Potential to revitalise premium growth
Long-term-care riders could give life insurance sales the boost
they need to overcome what has always been a tough sell to younger
customers. The total value of insurance premiums has been flat for
the past few years, and many new policies are simply replacements
for older, less efficient contracts. Riders that help people
protect their savings from health care bills have the potential to
revitalise premium growth.
It has worked wonders for John Hancock, whose LTC insurance unit
announced sales of $58.2 million for the second quarter of 2007,
representing a whopping 61 percent increase compared with the same
quarter last year.
Hancock’s Group LTC insurance posted its best sales quarter ever,
bolstered by the enrolment of several large clients and increased
activity in the emerging small- to mid-sized employer market. With
36 new clients and $23.9 million in new sales during the second
quarter alone, Hancock’s LTC business more than tripled.
The Hartford’s Financial Services Group has added LTC coverage as
an option on its variable universal life policy. The rider allows
clients to accelerate their death benefit up to the full policy
limit for daily living needs. And Axa Financial – which offers a
rider adding LTC coverage to its variable universal life policy –
has added LTC to its universal life offering.
By adding long-term care to life insurance that has an investment
component, customers feel they are getting a return for their
money, added to the satisfaction of knowing policy benefits will be
paid to their beneficiaries. Adding LTC to life insurance products
makes it easier for agents to sell the coverage without having to
learn all of its nuances, no small point given the fine print in a
full LTC policy.
Perhaps the most important driver is that LTC riders cost
considerably less than separate LTC policies, because the client is
paying to receive inevitable benefits early, policy limits
eventually will have to be paid to beneficiaries at the time of
death and death benefits are decreased by the amount used up for
LTC expenses. The premium for LTC riders attached to life insurance
policies is about 20 percent of what a separate policy would cost,
according to statistics provided by The Hartford. Their examples
show that a 45-year-old male would pay $218 annually for a rider
providing benefits similar to a full LTC policy that costs
$1,104.
That all adds up to form a fast-growing product, one sure to keep
growing as long-term care assumes a higher profile.
