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September 01, 2002 at 08:00 PM
Chelsea K. Bachrach
The marketplace is showing increasing interest in a hybrid product that consists of long term care insurance and an annuity (LTC-Annuity products).
Although this idea has been around for a while, insurers are beginning to take more notice of the efficiencies such products provide–both to policyholders and insurers–in comparison to their separately purchased stand-alone counterparts.
One indication of the level of interest in the products is the fact that, in June, the U.S. Treasury Department and the Department of Health and Human Services sponsored a forum in Washington, D.C., on LTC-Annuities. This meeting drew representatives of not only Treasury and HHS but also other federal agencies, the National Association of Insurance Commissioners, other state officials, governmental policy organizations (The Urban Institute, AARP, etc.), and insurance companies.
So, just what are these products all about? Their advantages are reminiscent of those in life insurance contracts that are combined with “acceleration” LTC riders.
In the life policies, economies are generated because the insurer can support two risks–premature death and LTC need–with one pot of money. Since insurance benefits are paid when the first risk is realized, the cost to the insurer of providing the LTC coverage is simply the time value money cost of paying all or part of the death benefit prior to the insureds death.
Similarly, with a LTC-Annuity, the structure is a combination of LTC insurance and a single premium immediate annuity. The advantages of this design stem primarily from the fact that the two risks being covered–longevity and the need for LTC services–are inversely related. Individuals needing LTC services generally will have shorter life expectancies than similarly aged people who do not require such services.
Because of the complementary nature of the risks associated with life-dependent immediate annuities and LTC insurance, a single insured is unlikely to require the full insurance “value” associated with both products–i.e., he or she is unlikely to experience an extended period of LTC need and then live to a very old age.
In effect, an insurer can “hedge” one type of risk with the other, and therefore the cost to provide the hybrid product is less than if the two products were purchased separately.
