Combination products first made their debut on the insurance industry scene about 15 years ago. Also known as asset-based long term care insurance or linked benefit products, combination products began as life insurance with long term care riders. Later, certain annuities began offering a long term care option. Today, many believe that these products offer a viable layer of protection for certain consumers -- and with the 2006 Pension Protection Act (PPA) in effect since Jan. 1, 2010, consumers enjoy certain tax breaks when they use the funds in a combination life or annuity product for long term care expenses.
In the face of extinct standalone LTCI lines and a growing cost-consciousness on the part of consumers, where do linked benefit products stand in a producer's portfolio? Who's buying them? And what do you need to know about this market -- and its future potential?
A compelling story
About five years ago, Carl Friedrich, a consulting actuary and principal of Milliman Inc., took an interest in linked benefit products that coupled life insurance with long term care benefits. At that time, he said, he began pulling together a research report for Milliman, in partnership with several associations, and ended up helping a major carrier build a new division dedicated to these life insurance combination products. Over time, he said, that carrier and other companies began adding annuity-based combination products, and Friedrich has developed two more papers since then that deal with the ins and outs of asset-based LTCI.
Over time, he said, a number of companies have had success with life insurance combos, and he believes there may be an even greater potential for annuity combination products.
"I think a compelling part of the story for annuity combinations is that the PPA created a change in the tax law. There's only one way that policyholders can get gains in their annuity contract out on a tax-free basis, and that's if those accumulations are paid out as long term care benefits," he said. "It's pretty understandable in terms of converting a $150,000 annuity into long term care protection that may be three times that in certain circumstances."
(See "The Pension Protection Act: How it Changed Combination Products," for more information on the PPA and its effects on this market.)
The mechanics of a combination product
So how do these products work? Whether the long term care benefit is being funded by a life insurance or annuity product, there is a level of self insurance involved in both options. For annuity combinations, said Friedrich, the first layer of coverage typically comes from the payout of the account value -- in other words, from money that belongs to the policyholder. In life combinations, he said, the face amount pays for long term care benefits, with a portion of those payouts also coming from the cash value.
The upshot of paying for long term care costs in this manner is that it dramatically reduces the cost of coverage when compared with a standalone long term care insurance policy. For example, while the average premium on a standalone policy may run $2,200 per year for consumers in their early 60s, a long term care rider on an annuity could cost less than $1,000 per year.
However, because combination sales are typically funded on a single-premium basis, said Friedrich -- as opposed to the annual premium setup of a standalone policy -- combination products may be inappropriate for many consumers.
"The simple bottom line is the purchaser of these contracts needs to have funds available to secure the coverage -- and substantial funds," he said. "The average premium is in the $80,000 to $100,000 range to provide meaningful coverage, whereas the standalone long term care buyer doesn't need $100,000 of liquid assets to move into a protection vehicle -- they simply pay the annual premium year after year for 30 years or more."
Producers should also be aware that these policies are best for short-term claim situations, said Jesse Slome, executive director of the American Association for Long-Term Care Insurance. In other words, if a policyholder's claim goes on for more than five years, they may have been better off with a traditional long term care insurance policy -- unless they have the funds to self-insure the remainder of the bill and are comfortable with the idea of "high-deductible" coverage.
The benefits of combo products
Despite the relatively limited prospect market for asset-based long term care coverage, these products can remove one of the biggest objections faced by long term care insurance producers: The hesitation of a prospect who believes they may not ever have a long term care event, and therefore may not ever need to use benefits paid by a standalone long term care insurance policy.
According to Jason Goetze, an LTCI specialist in the greater Milwaukee area with more than 20 years' experience on the carrier side of the fence, those paying into combination products will always end up using the anchoring product -- whether it's a life insurance policy or an annuity -- making the sale more palatable for certain consumers.
"There are certain consumers who absolutely will not buy a standalone long term care policy," said Goetze. "They have this notion that if they don't use it, they lose it, and the combination policy is the ticket for them."
Slome cautions producers, however, against selling these combination products strictly as a way to obtain long term care protection for clients. As with non-combination policies, applicants must have a real need for life insurance -- which means that only in certain circumstances will a product like this truly make sense for a prospect.
Where it does make sense, said Goetze, is when clients have old life insurance policies that have built up a great deal of cash value but which carry a death benefit that may not be as relevant to the client's situation as it used to be.
"A lot of those people are taking old life insurance policies and converting them to a combination product, and in essence, what they're doing is getting a single premium life insurance policy with LTCI without additional premium payments," he said.
These products may also be a good sale for first-time life insurance buyers who may be young enough that they don't want to spend the extra money on long term care insurance, but are seeking some level of long term care protection.
One other thing to keep in mind with combination products is that they do tend to be more complex than a standalone long term care insurance policy, with licensing and CE requirements applying to the long term care portion of the sale.
"If a producer doesn't have the time or the willingness to really understand these products, then it would be a disservice to the clients to be presented that and possibly misunderstand what they purchase," Friedrich said. "But we'd encourage agents to take those steps, because I think it is a tremendous opportunity for producers, as well as their clients."
The future of combination policies
While the PPA has gone far in making the products more attractive to insurance companies, producers, and consumers alike, the low-interest-rate environment may be contributing to their low usage rate, said Slome -- at least when it comes to annuity/long term care policies. Because the additional cost of a long term care benefit ranges from 60 to 120 basis points, an annuity that pays a 3 percent return today would have its return reduced by 1 percent by the long term care benefit -- a one-third reduction in the product's yield. But as interest rates increase, he said, the product could become more attractive and more competitive because consumers will see a much higher yield even in the face of a long term care benefit.
"When the interest rates are at 6 or 7 percent, a 70-basis-point cost for the long term care benefit is only 10 percent of the return," said Slome. "It becomes a much easier financial decision for the consumer to say, 'Instead of a 7 percent return, I'll take a 6.25 percent return because I get all of this added long term care benefit protection.' "
One challenge producers may face is that even today, combination products may be difficult to find in the marketplace. For one, said Slome, there are very few carriers offering the product at this point, and those that do haven't done much in the way of awareness and support -- and haven't focused much on the traditional agent, either.
"I get calls once a week at least [from producers] asking, 'Which companies have the latest and greatest products, and where are they?' They're not hearing a lot about them. They're only gradually being rolled out by the industry," he said.
Friedrich also believes that the increased activity on the combination product development front can only mean good things -- and that it will be a matter of time before producers begin seeing more combination plans from more companies. After all, said Goetze, it's something many producers can get into.
"It's good for both the committed long term care producer and the dabbler," Goetze said. "The dabbler is going to have other products that he or she normally sells, and they're selling a half-dozen long term care policies a year, so it may be easier for them if they're life insurance agents to understand how a combination product works than for them to understand how a standalone product works."
Christina Pellett is the editor of the Agent's Sales Journal. She can be reached at 800-933-9449 ext. 226 or ASJeditor@AgentMedia.com.