Moderator: Carl A. Friedrich, FSA, MAAA. Presenters: Benjamin Goodman, FSA, MAAA Lane Kent

Transcription

1 Session 39 PD, The Retirement Dilemma: Buying Longevity Products or Covering Your Health Care Costs Analysis from a Sales and Marketing Viewpoint Moderator: Carl A. Friedrich, FSA, MAAA Presenters: Benjamin Goodman, FSA, MAAA Lane Kent

2 Life Annuities 101 Benny Goodman PD 39 Monday, October 27 1:45PM 3PM

3 Life Expectancy 78? 85? 87? Probability 50% versus 75% Doing it on your own - 90%? 2

4 3 The Twin Sister Challenge - V1

5 Guarantee Periods Single Life Annuity $6,964 With 10 year guarantee $6,789 With 20 year guarantee $6,237 A 20 year guarantee ensures (and insures) your money back! 4

6 5 The Twin Sister Challenge - V2

7 Framing Investment versus Consumption RoR versus spending Downside versus Upside Where is the real risk? Showing income on quarterly statements What is the plan really for? 6

8 The Income Floor Everyone has one Social Security is not enough Lifetime Annuity Floor varies by income level 7

9 Things to think about Health Who needs your money? Cognitive ability Live Longer! 8

10 Long Term Care Lane B. Kent, LTCP

11 The Long Term Care side of the Retirement dilemma Three big questions and then some discussion Why do we care? What s the problem? What can be done about it? 10

12 Why we care; The Chronic Care Risk The risk is real* 69% of those aged 65+ will require functional assistance before they die One-in-six will have costs of $100,000 or more One-in-twenty five will spend $250,000 or more The cost of care outweigh most families ability to self-insure the risk A private room cost an average of $248 daily, or more than $90,500 annually, according to a 2012 survey by MetLife. Home care costs anywhere from $18-$30 per hour depending upon location and provider experience/certification US Federal Government has acknowledged the problem, but has failed to provide a solution CLASS Act 2010 public insurance for disabled and aged, killed by legislative act in 2013 PPA 2007 clarified tax treatment of 1035 exchanges to certain policies with LTC benefit BBA 2003 expanded state/private Partnership plans HIPAA 1996 created Tax Qualified LTC insurance *Kemper P, Komisar HL, Alexcih L. Long-term care over an uncertain future: what can current retirees expect? Inquiry. 2006;42(4):

13 Why we care; US LTSS Landscape Total spend on LTSS is $363 billion* estimated to be ~$1 Trillion by 2050** ~7 Million covered with Private LTC insurance (of 309 Million = 2%) US Unfunded liabilities ~$127 Trillion Usdebtclock.org Dually eligible (Medicare & Medicaid) ~9 million, target of pilot programs evaluating the total of cost of care with patient-centered approach Graphic from SCAN foundation, as presented to LTC Discussion Group July 17, 2014 * Kemper, P. Komisar, H. and Alecxih, L **Frank RG. Long term care financing in the United States: sources and institutions.

14 Private LTCi, (not)trending Total claim payments of $3 billion in 2012, up 18% from 2011, but just 1% of the total costs. Reporting insurers have paid over $20 billion in claims through More Company exits in 2012; only 18 insurers reported new sales in 2013 and the top five writers account for over 75% of new premium. Product trends Gender-based pricing, removal of Life Time benefit period, just a few policies feature Cash benefit. Shift toward scheduled additional coverage purchases GPO/FPO (up from 13% to 20%), but compound inflation still being purchased despite the cost (56%), with 3% being bought now more than 5%. Average issue age has dropped to 56. Ages 45 to 59 account for just over 50% of all policies sold. Only 16% are over age 65 (this segment once accounted for over 70% of new sales) Average daily benefit amount is $160/day. Roughly 40% of couples bought shared care. The most popular duration for shared care is 4 years (1/3 of all shared care sales). Reflecting discontinuation of Lifetime benefits 2013 sales of ~175,000 new policies down 26% from 2012, pre 2003 levels 13 LIMRA 2012

15 The problem; Private LTCi is in decline Challenging Regulatory framework (NAIC model, HIPAA) Benefit triggers for low level of dependence Mandate to offer inflation protection not reflective of economic realities Rate stability threshold is high Premium adjustment has political undercurrent Poor legacy product experience Missed lapse assumptions Underwriting too loose, then too stringent Bad actors exited business then engaged in extensive rerating Supply issues Little capacity (insurers and reinsurers) Low interest rate environment Rerating challenges Scarce domain knowledge (actuarial, underwriting, claims management, medical direction) Disenfranchised producers Demand issues Popular features withdrawn Product too expensive, average premium >$2300 annually Scarcity of discretionary funds to spend on insurance (the Retirement Dilemma) Lack of awareness of the need 14

16 What can be done; The discussion Leading Age and LTC commission, 7 Pathways Status Quo do nothing different Personal Responsibility reduce scope of government, everyone is on their own, figure it out Private Market take steps to strengthen private market (new tax incentives, mandate coverage, loosen regulation, etc.) Private Catastrophic redefine product as total loss of dependency, take steps to encourage purchase through private insurers Public Catastrophic same as Private Catastrophic with government as the insurer Common Good Government coverage for entire risk, funded through broad taxation Comprehensive elements of the above in some combination 15

17 What can be done Bias 20+ years in private industry, but material involvement in public policy efforts last 10 years Mandate coverage for working adults Supplement to Medicare for retirees Buy through workplace and exchanges Pretax, partial employee funded Progressive benefit triggers Cash model, emphasis on home based care, family support Cheaper and better product, deeper penetration Societal and Individual Preparedness Lift Medicare Lifetime SNF limit Standardize Home and Community Care waivers Standardize needs assessment process Reduce chronic care risk exposure for States, leaving them to focus on the poor and disabled Government care for total dependence 16

18 17 Should I buy LTC Insurance?

19 Combination Plans Several forms of coverage that package life or annuities with LTC First layer of coverage usually from acceleration of base plan assets As such, essentially represents a form of self-insurance Example 1: Deferred annuity coupled with LTC With no LTC event, policyholder can annuitize values for lifetime income With an LTC event, annuity values are drawn down, after which point independent monthly LTC benefits continue; the longevity concern is secondary in this scenario Example 2: Annuity doubler Payout annuity in place to provide lifetime income With an LTC event, payouts are doubled to address at least a portion of the cost of LTC The cost of the LTC coverage is reflected as a lower basic monthly payout (non-ltc claimants have a longer life expectancy, which should be reflected in the payouts) 18

20 Combination Plans Estate planning example 2 $150K nest egg to address LTC risk SPDA only, SPDA funding 6 year standalone LTC with 3% inflation, or Combo annuity with 2 year acceleration of AV and 4 year extension of benefit provision Issue age 65, claim age 80 19

21 Should I buy LTC or Combo Insurance? 400,000 Estate Planning 300, , ,000 (100,000) (200,000) (300,000) No LTC claim Annuity No LTC claim Annuity/LTC Combo Annuity paying LTC premium, with or without claim LTC Claim Annuity/LTC Combo LTC Claim with Annuity Only (400,000) (500,000) 20

22 Combination Plans Conclusions SPDA only is optimal if claims never occur, but $150K can be depleted in two years (or less) and the shortfall can be considerable with a longer term claim, depleting other assets or income Combo annuity reduces the nest egg gradually over time, caps the cost of LTC at the value of the nest egg, and covers excess costs thereafter LTC reduces the nest egg more quickly, but can cover the entire cost of LTC if purchased with inflation benefits Longevity concern is reduced after a LTC claim, but depletion of estate values and ability to cover LTC costs is the concern without some form of LTC insurance 21

23 The Dilemma The chronic care risk is real and must be addressed Longevity places new challenges on an already difficult problem to solve Addressing one risk while neglecting the other is nonsensical The insurance industry has yet to provide a complete solution so consumers are faced with this dilemma someone had to do something, its just incredibly pathetic it had to be us J. Garcia 22