Pension reform law jump-starts hybrid LTC products

Oct 9, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Many insurers are jumping on the long-term-care hybrid-policy bandwagon thanks to the recently passed Pension Protection Act's tax advantages, according to industry experts.

Money taken from an annuity's or life insurance policy's cash value account to pay for an LTC rider isn't included in taxable income under the new law.

"Prior to the passage of the new pension law, premiums for LTC were taxable to the policy owner," said John Lancaster, president of Guaranty Income Life Insurance Co. in Baton Rouge, La. The company developed a combination annuity and LTC product seven years ago following passage of the Health Insurance Portability and Accountability Act, which allowed tax-free LTC benefits but not premiums.

Renewed hybrid interest

In response to the law, "a number of significant insurers with extensive long-term-care-insurance experience have recently introduced or are preparing to launch new annuity or life products," said Jesse Slome, executive director of the American Association for Long-Term Care Insurance in Westlake Village, Calif.

Genworth Financial Inc. in Richmond, Va., said recently that it is developing a combination annuity and LTC product that the company expects to launch by the end of the year, according to Shekar Jannah, project management leader for the protection segment.

In addition to the tax advantages, premiums would be about 10% to 20% less than if the products were purchased separately, he added.

"The combined product will be for the upper-middle segment of the market, as there is a $50,000 initial contract investment required," Mr. Jannah said. "It's designed mainly for people in their late 50s or early 60s."

Bankers Life and Casualty Co. in Chicago released a new hybrid life insurance and LTC policy last month. "This rider is a much needed option for the senior market," said Scott Perry, executive vice president and chief operating officer.

Policies that combine whole-life and LTC insurance already exist. These policies allow "acceleration of death benefits" to pay LTC benefits tax free, but they don't provide for tax-free premiums.

Genworth has had a universal-life-insurance policy with an LTC rider since April.

Lincoln Financial Group in Philadelphia pioneered hybrid life insurance and LTC, introducing the first such policy in 1988.

"We are working on an annuity modeled after that life product," said Mark Doherty, business leader for Lincoln's universal-life/long-term-care hybrid business. The product launch "does not have a defined time frame," he added.

"The challenging part of the legislation is that the new LTC tax advantages don't begin until 2010, and it's hard to predict whether there will still be sizzle for such products at that time," Mr. Doherty said.

Annuities and policies issued after Dec. 31, 1996, are eligible for the tax breaks but only for taxable years starting after Dec. 31, 2009.

Insurers are developing the products now, because getting them approved by the 50 state insurance departments can take several years. Slowing the process even further is the fact that hybrid policies sometimes must be approved by both the life insurance and health insurance divisions if those departments.

Not all rosy

According to an AALTCI survey conducted a few weeks before the pension law's passage, 29% of agents indicated that they had sold a life or annuity product offering LTC benefits within the previous year. But 59% said that they expected to sell one within the next 12 months, the study found.

A downside of combination policies is that older policyholders who may no longer need the life insurance component might have to keep the entire policy in force in order to maintain the LTC rider. Also, for less affluent clients, the annuity or policy account balances might be insufficient to pay for the rider, the experts noted.

"These combination policies are complex, because they add LTC benefits to already complicated annuity and life insurance structures. The more progressive companies are trying to simplify the underwriting and develop products that are more appealing to the masses," said Peter Gelbwaks, president of Gelbwaks Insurance Services Inc. in Plantation, Fla.

"The reform law and the combo products - which often have premiums in the $50,000 range - are more for the financial planners and their clients, who tend to be at the upper end of the market," said Patrick Bradley, vice president of national sales for LTCI Partners LLC in Madison, Wis. "There's still the problem of making LTC insurance more available to the middle market."

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