New combination products—menus of choice for seniors

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By Carl A. Friedrich | 01 August 2006

Long-term care insurance has been recognized as a growing consumer need in the U.S. insurance market, yet standalone long-term care policies have not fully met that need. Over 15 years ago, combination life/long-term care products were just beginning to be offered in the insurance market, with an emphasis on the senior market. The most common versions of these products featured long-term care riders attached to universal life policies. These riders accelerated death benefits in the event of specified triggers related to long-term care needs, typically with monthly benefit payments during the period of care. The cost to the insurer of accelerating death benefits was very modest, since future death benefits were reduced dollar for dollar under this recipe for insurance. In addition, a portion of the accelerated payout in reality was taken from the cash value of the contract, which was typically available to the policy owner in any event.

In contrast to these low-cost riders, which essentially included a form of self-insurance, an alternative design appeared in the U.S. market. That approach featured long-term care benefits, which were independent of the underlying life insurance policy, with long-term care insurance benefits having no effect on future cash values or death benefits payable under the base life policy. Proponents of this second structure argued that seniors' life insurance needs did not necessarily decrease with the need for long-term care services, particularly as the life coverage was often intended to address estate planning needs. Further, it was noted that in many cases the accelerated benefit designs fell short of providing comprehensive long-term care coverage, particularly for smaller life contract face amounts. The independent benefit design didn't offer meaningful savings versus costs of a standalone long-term care policy, in contrast to accelerated benefits, but the two approaches both served to fund the cost of long-term care insurance through a flexible premium, tax-deferred accumulation vehicle.

So what impact have these products had in the market over the last 15 years? A few companies who have focused on these innovative combinations have had considerable success, but they have represented a small portion of the overall long-term care insurance market. There are several factors that point to changes in that position.

  • Convergence of the two designs. Companies specializing in these markets in the last few years have recognized the strengths and weaknesses of each approach, and have put together combinations that include a menu of choices from both structures. For example, a life base plan may be offered with a selection of a 24-month or 36-month long-term care insurance payout of some or all of the full death benefit, with some residual death benefit preserved to address the needs of the life insurance beneficiary. In addition, an independent long-term care rider may also be attached to the same policy, extending the long-term care coverage beyond the 24- or 36-month period for another range of months as selected by the policy owner. Further, these combinations frequently offer inflation benefits, nonforfeiture benefits, and other features that are standard in the long-term care insurance marketplace.
  • The number of long-term care insurers has shrunk considerably in the last five years. This has occurred despite the growing needs of this underserved market. Many insurers that are not yet comfortable with the risks of standalone long-term care insurance are exploring various flavors of products which reduce those risks to the insurer, via death benefit offsets in accelerated benefit features or via the use of long elimination periods inherent in independent long-term care riders. Several other companies are intent on pursuing this marketplace, and are actively considering products which in some cases extend beyond life and long-term care insurance.
  • Advances in underwriting. These advances are allowing companies to become more comfortable with some of these exposures in the senior market. In particular, cognitive assessment screens are becoming more sophisticated and streamlined. Cognitive tests that can be effectively administered over the telephone with a high level of accuracy, both in terms of detecting early stages of impairment and not signaling false positive results, are being utilized. This can be particularly important in the distribution of combination products.
  • Premiums for new standalone long-term care coverage have increased. These increases are due to low market interest rates, high persistency, and U.S. regulatory requirements. As a result, producers are recognizing the need for more affordable forms of long-term care insurance. Financial planners and banks are also increasingly recognizing the importance of addressing long-term care needs. Many are finding these new combination products appealing as they advise their clients to reposition their assets into these vehicles, providing a three-course serving of benefits including cash values, life insurance, and long-term care insurance.

Looking ahead, it will be interesting to see what new product developments emerge in the area of combination products. There are efforts in the U.S. Congress to clarify and enhance the tax treatment of life and annuity policies combined with long-term care. Even with some open questions regarding tax treatment of some of these designs, we expect companies to continue to move to meet the appetites and needs of consumers. If clarifying tax legislation advances, we expect that an even broader menu of combination plans would emerge, to the benefit of the insurers, distributors, and consumers.

Carl Friedrich is a consulting actuary and principal with Milliman’s Chicago-Lake Forest practice. He specializes in the design and pricing of life insurance, long-term care, and annuity insurance products, with an emphasis on emerging combination multiline products.