By David F. Royer
I f your Annuity Practice needs a little extra vitality these days, the emerging Annuity/Long-Term Care Combo Market could be the ideal solution. The Pension Protection act of 2006 changed many things in the financial services industry, but one change could put you on the road to increased annuity sales.
It all started in 1999 when the Guaranty Income Life Insurance Company, of Baton Rouge, LA, teamed up with Mike Sause to design the first Annuity/Long-Term Care combo product introduced in America. Later Genworth, Great American, State Life, John Hancock, Nationwide and United of Omaha joined the crusade to help the many un-insured, retired Americans find an affordable and attractive alternative to traditional Long-Term Care insurance.
The product design was simple. Your prospect would buy a tax deferred annuity and a portion of the interest earnings would be used to buy a Long-Term Care rider. The rider could as much as triple the annuity value for to pay for LTC expenses. In other words, an annuity deposit of $100,000 would provide a Long-Term Care benefit of up to $300,000. The benefit to the client was the ability to use an existing asset to leverage their money into LTC benefits without paying any out of pocket premiums. Best of all, if they never needed their LTC benefits, they could get their annuity deposit back, plus any net interest or it would be passed to their heirs, Penalty Free, at death. What could be better than that, benefits if you need them and your money back if you don’t? It seemed like the perfect product for seniors who have limited income to pay for traditional LTCi premiums, but do have savings they never intended to spend.
These innovative products provided much needed benefits for the 85% of retirees over age 65, who chose not to buy traditional Long-Term Care Insurance and they also created an opportunity for advisors to increase their annuity sales substantially.
Tax deferred Annuities that also offered LTC benefits seemed like the perfect marriage of safe money alternatives and much needed Long-Term Care benefits. There was however, a small glitch. The annuity interest that was used to pay for the LTC rider was considered a taxable distribution from a tax deferred annuity. Each year the client would receive a 1099 for the amount of interest deducted for the rider premium. This was not an easy concept to explain to prospects and could potentially bring the sale to a halt. Now for the good news: Under the Pension Protection Act, beginning Jan.1 2010, the annuity proceeds used to pay for the rider is no longer taxed. Think about it. Tax free premiums and tax free LTC benefits are a powerful combination, particularly in light of the income tax bracket increases expected to begin in 2011.
These changes have created a very ripe environment for increased Annuity based Long-Term Care sales.
4 things to look for when choosing the Annuity/LTC combo product that best fits your prospects needs.
1- Underwriting – This can take from 3 business days with some companies and as long as 6 weeks with others. Some companies have developed streamlined underwriting that involves nothing more than a telephone or face to face interview, while others use the traditional LTC underwriting that requires attending physicians’ statements and the gathering of medical records. The longer the underwriting process, the more likely your prospect will suffer from buyer’s remorse.
2- Waiting periods to be eligible for LTC benefits – Waiting periods vary form as short as 90 days to as long as 2 years. You may not want to explain to your client who just broke a hip that they will need to wait out the balance of 2 years before they will be eligible for any benefits.
3- Total LTC Benefit - Some combo products offer 3 times the annuity value for LTC benefits and others offer only 2 times the annuity value. Also the number of years that the LTC benefits can be paid varies by company.
4- Experience and rate stability – The longer the company has been offering combo products without any LTC rate increases, the better.
Think of your annuity prospects who don’t own Long-Term Care insurance. Would they be more prone to buy an annuity that also offers LTC protection or one that doesn’t? Moving an underemployed asset, like a CD or Money Market Account, to an Annuity LTC combo product will provide tax deferred growth and save your clients thousands of dollars of out of pocket premiums for Long-Term Care insurance.
The Pension Protection Act has brought the Annuity based Long-Term Care Market to its full maturity and has provided annuity producers a new reason to call on existing and prospective clients and an opportunity to increase their annuity sales.
