InsuranceNewsNet Magazine September 2010 : Page 32
CWill A of LTC graphical ly demonstrated market need? I daresay not often. In the 1980s the second-to-die life H insurance policy came into being and was immediately very successful. It meshed superbly with many market needs, among the more notable being the need for liquidity at second death and the need to provide funds to pay estate taxes. With the advent of secondary guarantee designs, where the price was guaranteed regardless of the financial environment, such sales really took off. Around the year 2000, annuity com-panies introduced guaranteedminimum withdrawal (or sometimes income) ben-efits, which promised ongoing annual cash flows regardless of actual invest-ment returns. Sales of these contracts accelerated when companies promised to make the annual payments for life. Just in case you aren’t an annuity pro-ducer, let’s say that a prominent company promises 7.2 percent a year growth in the account upon which the annual pay-ments are based. The account doubles in 10 years, so that if $100,000 is depos-ited today, this special account (not avail-able on surrender) will grow to $200,000 after 10 years. If the company promises a 6 percent annual payout, that means buyers will receive $12,000 annually for the rest of their lives. If one examines the performance of the financial markets (a CWill A o of LTC graphical ly demonstrated market need? I daresay not often. In the 1980s the s ill A of LTC graphical ly demonstrated market need? I daresay not often. In the 1980s the second-to-die life H insurance policy came into being and was immediately very successful. It meshed superbly with many market needs, among the more notable being the need for liquidity at second death and the need to provide funds to pay estate taxes. With the advent of secondary guarantee designs, where the price was guaranteed regardless of the financial environment, such sales really took off. Around the year 2000, annuity com-panies introduced guaranteedminimum withdrawal (or sometimes income) ben-efits, which promised ongoing annual cash flows regardless of actual invest-ment returns. Sales of these contracts accelerated when companies promised to make the annual payments for life. Just in case you aren’t an annuity pro-ducer, let’s say that a prominent company promises 7.2 percent a year growth in the account upon which the annual pay-ments are based. The account doubles in 10 years, so that if $100,000 is depos-ited today, this special account (not avail-able on surrender) will grow to $200,000 after 10 years. If the company promises a 6 percent annual payout, that means buyers will receive $12,000 annually for the rest of their lives. If one examines the performance of the financial markets (a ow ow often in a career does a sea change in product design accompany a huge demo-painful exercise) in past years, one can readily see how good a deal this is. Annuities are instruments sold to near-retirees and retirees.Market research of the past few years has consistently shown that such buyers are especially concerned with funding a variety of retirement and older-age needs. Alone, the annuity meets many of these, including deferred income accumulation and the assurance that owners will not outlive their income. But until now the annuity has not pro-vided for the protection needs of old age, namely coverage for the costs of chronic illness. So the timing of new solutions couldn’t be better. Why is that? If retirees live in Hawaii or certain mainland states, such as Cal-ifornia, New York and Massachusetts, pity them if they have to go into a nursing home. For the big mainland states, aver-age monthly costs are well over $10,000 for a decent private facility. In Hawaii, the costs can be about $13,000 a month, which is more than $150,000 annually. Even if a retiree has reasonable sources and amounts of retirement income, such dramatic costs completely bust the budget. There are three shaky legs to the tradi-tional LTCi stool, the first being product cost, of course. The second is the phenomenon known as “use it or lose it.” This refers to the possibility that an individual may pay premiums for many years and then die without having become chronically ill. (Some refer to this as good luck.) If this ure Slowing Annuity Sales? By Cary Lakenbach happens, the buyer will have had years of paying premiums without deriving any benefit from it. The third is the almost-impossible underwriting that insurers have in place to examine and rate the risk. Advisors and applicants rightly fear the process. The process can take weeks, only to result in a denial of coverage to the applicant and no commission income to the producer. A much better solution has now arrived on the scene, thanks in signifi-cant part to the passage of the Pension Protection Act of 2006. The provisions of this act relevant to LTC became effec-tive at the start of this year and are sig-nificant. The highlights include the following: 1. Only nonqualified annuities may contain so-called qualified long-term care insurance (QLTCI) riders. 2. Benefits under such riders that pay for qualified LTC expenses are received income tax free. Such bene-fits may include and, in fact, gener-ally do include amounts of annuity cash value. 3. Charges against the annuity cash value to pay for the protection ele-ment are never taxable. 4. With some restrictions, the law allows existing annuities to be exchanged, under Section 1035 of the Internal Revenue Code, to such new “combination” annuities.
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