Alternative Products. Again? ILTCI Conference: March 5, pm. Session 48: A Roundtable Discussion by Industry Experts.

Transcription

1 Alternative Products Universal LTC: A New Product Idea Again? ILTCI Conference: March 5, pm Session 48: A Roundtable Discussion by Industry Experts Moderator: Speakers: Jim Stoltzfus Carl Friedrich Dean Kerr Craig Springfield 1

2 Agenda Characteristics of Life Combo Products Characteristics of Annuity Combo Products Characteristics of Universal Life Products Universal LTC Insurance (ULTC) What might the product look like? What are the benefits of such a product (policyholder perspective versus insurer perspective)? What are the hurdles facing such a product? Q&A 2

3 Products Intended to More Efficiently Cover the Risk of Chronic Illness Life Combo Products At the onset of chronic illness, insureds have a much reduced life expectancy. Cost of accelerated death benefit LTC coverage is largely the time value of money cost of paying the death benefit early Annuity Combo Products A portion of LTC insurance benefits is funded (in various ways) through annuity values. This co-funding reduces the cost of pure LTC coverage. Universal LTC Can LTC coverage be made to work like universal life insurance? 3

4 Characteristics of Life Combo Products Current Design Characteristics Provision of an accelerated death benefit for LTC Extension of benefit and other non-acceleration benefits Benefit triggers: To qualify under sections 7702B or 101(g), the insured must be a chronically ill individual as defined in the tax law Funding: periodic charges with dollar for dollar death benefit reductions, actuarial discount, or death benefit & cash value offset or lien Guaranteed renewable Reimbursement or per diem benefits? Terminal Illness ADBs Other Life Combos Critical illness ADBs and other ADBs not meeting the requirements of section 7702B or 101(g) Chronic illness riders, falling under 101(g) and Model Reg 620 (not LTC) 4

5 Characteristics of Life Combo Products Current Marketing Characteristics Sold to individuals wanting to cover both life insurance and LTC insurance risks in a single efficient package Basically, are covering two risks with one pot of benefit dollars For purchasers needing permanent life insurance protection without diminishment by any prior LTC event, a stand-alone alone LTC policy usually is the better option 5

6 Characteristics of Life Combo Products Legal, tax and regulatory issues State law regime: Based on NAIC s LTC Models or the NAIC s Accelerated Benefits Model Regulation The Health Insurance Portability and Accountability Act of 1996 enacted sections 101(g) and 7702B Each of these provisions i allows for ADB products. An ADB rider might comply one or both provisions, but under the tax law it s only necessary to meet one of these provisions in order for the ADBs to be excludable from gross income for tax purposes. The per diem limitation may limit the exclusion for products providing per diem rather than reimbursement benefits (for both section 7702B and 101(g) riders) 6

7 Characteristics of Annuity Combo Products Legal, tax and regulatory issues NAIC LTC Models recognize that LTC coverage can be provided in combination with an annuity The Pension Protection Act of 2006 amended section 7702B(e) to authorize qualified LTC insurance annuity combo products Such authorization does not extend to employer and qualified plan arrangements 7

8 Characteristics of Annuity Combo Products Current Design Characteristics In a deferred annuity combo, because LTC benefits usually are defined in terms of the annuity value at the time of claim (i.e., e the co-funded element), it s common for such products to be purchased with a large single premium As discussed below, if universal long-term care insurance were to utilize an Annuity-LTC chassis, would lower periodic or planned premiums be workable? Periodic charges assessed against annuity cash value Coinsurance, tail design and other benefit structures Payout annuity LTC combos 8

9 Characteristics of Annuity Combo Products Current Marketing Characteristics Usually for individuals already desiring an annuity product Low cost way of obtaining LTC coverage Degree of efficiency depends on design structure Some purchasers may want a more significant pure, independent LTC insurance element, even though doing so will raise the overall cost of coverage Difficult since contracts usually do not involve periodic premiums and thus the cost of LTC coverage will potentially exceed the return on annuity cash values. A major challenge in the current interest rate environment As with life LTC combos, benefits are tax-free (including those funded from inside build-up). up) With per diem designs, the exclusion is capped by the HIPAA per diem limitation. 9

10 Characteristics of Universal Life Products Account Value => Concept of Net Amount at Risk (NAR) Current Design Characteristics Fixed, single or flexible premium structures Fixed, variable or indexed accounts Level or increasing death benefit Charges include premium loads, expense loads, cost of insurance (COI) and surrender charges Bases for charges: contract, face amount, premium, fund, NAR Access to AV via loans, partial withdrawals or full surrenders Insurer also earns a spread on the earned vs credited rate Both current and guaranteed components No-lapse guarantee (NLG) now common 10

11 Characteristics of Universal Life Products Account Value Roll-forward Account beginning of month + Premium - Policy Loads - COI Charges - Rider Charges + Credited Interest (Variable return for VUL) - Benefits = Account end of month COI Charges = NAR times monthly COI rate NAR = Face amount less AV after premiums and loads 11

12 Characteristics of Universal Life Products Current Marketing Characteristics Permanent life insurance protection with access to cash values that accumulate on a tax-deferred basis Flexibility for the policyholder Amount and timing of premium payments Death benefit adjustments Access to cash values Riders to customize the coverage Accumulation versus Protection ti focused products Indexed UL continues to gain market share Historically an accumulation sale, but long-term NLG feature allows it to compete for the protection sales 12

13 Characteristics of Universal Life Products Sample UL policy illustration Policy Age Regular Fund NAR CSV Face Amount Avg Credited Period (EOY) Premium (EOY) (EOY) (EOY) (EOY) Rate Y1 51 2, , , % Y2 52 2, , , % Y3 53 2,000 1,332 98, , % Y4 54 2,000 1,817 98, , % Y5 55 2,000 2,323 97, , % Y6 56 2,000 2,852 97,148 1, , % Y7 57 2,000 3,405 96,595 2, , % Y8 58 2,000 3,983 96,017 3, , % Y9 59 2,000 4,586 95,414 4, , % Y ,000 5,217 94,783 5, , % Y ,000 8,821 91,179 8, , % Y ,000 13,311 86,689 13, , % Y ,000 25,871 74,129 25, , % Y ,000 45,360 54,640 45, , % Y ,000 75,598 24,402 75, , % 13

14 Characteristics of Universal Life Products Legal, tax and regulatory issues State law regime: Based on NAIC s UL Model Reg and Valuation of Life Insurance Policies Model Reg (XXX) UL CRVM / XXX / AG36 for IUL / AG37 for VUL / AG38 for NLG Application of non-forfeiture provisions becomes fairly complex for UL To qualify as life insurance under IRC Section 7702 (and not be deemed an investment vehicle) certain conditions must be met Namely, the relationship between a policy's death benefit, its cash value and paid premiums must satisfy certain requirements If a policy is deemed a Modified Endowment Contract (MEC) under 7702A, then any distributions will generally be taxable on an income-first basis and may be subject to a 10% penalty tax (age 59 ½ or younger) For accumulation UL, can change non-guaranteed elements under certain conditions; for protection UL (lifetime NLG) options are more limited Regulatory or legal hurdles are possible in these situations and insurers must ensure policyholders ld (classes) are treated t equitably 14

15 Universal LTC - Design What does ULTC look like? Stand-alone LTC policies function like traditional Whole Life The basic idea underlying ULTC is to mirror certain of the design elements of universal life insurance Flexible premiums (Minimums? Maximums?) Flexible benefits (Monthly? Lifetime? Nature and scope of covered services?) An account value Part of LTC return of premium feature or would this be an Annuity LTC combo in form? What is the crediting mechanism? Cost of insurance? Can term like rates be used that increase with the insured s age? For basic coverage? Inflation protection? ti After age 65? Interest? Variable LTC? (Section 817(d) problem. Annuity-LTC chassis?) Other assumptions where an adjustment to AV might be made? 15

16 Universal LTC - Design Need for term COI rates in the account value calculation? Any analog to 2001 CSO or is a standard COI table unworkable due to benefit trigger and benefit differences among policies? i Is the aggregate premium cap problematic? Any workaround? Would account values allow for exchanges of coverage? Would this help protect consumers from large rate increases? Problem of increased age (and of possibly becoming uninsurable) Need a robust market in order for exchanges to drive efficiency What might be lost in exchanges (rights to future inflation protection; other guarantees?) Restricting surrenders to exchanges only? 16

17 Universal LTC - Design Can current products be converted to make Universal LTC? State law barriers? Federal tax barriers? Section 1035 allows exchanges of one qualified LTC insurance contract for another qualified LTC insurance contract. But is there value to exchange? Internal versus external exchanges? Grandfather considerations? What s potentially to be gained? What are the concerns of various stakeholders and how might they be alleviated? 17

18 Universal LTC - Design What would this look like to a potential insurer? Returns RBC impacts Risks Marketing issues 18

19 Equity Indexed Universal LTC - Design Premium to endow $250K Equity Indexed Universal Life Level Premium Illustration Female 55, 5% crediting rate Premium to endow $250K 2 Yr ABR + 2 Yr EBR EIUL/LTC Combo 4 Yr EI-ULTC Premium = Life Combo 4 Yr EI-ULTC Premium to Endow Year Prem CV DB Prem CV DB Prem CV DB=CV Prem CV DB , , , , , , ,073 28, , , , , ,431 94, ,741 44, , , , , , , ,694 89,694 Age 100 Age , , , , , , , , , , , , ,502,033 1,502, , ,000 19

20 Universal LTC - Marketing Can this product as discussed appeal to agents and prospective insureds? Commission structure in light of flexible premiums and benefits and the possibility of exchanges? Will contracts be adequately funded? Depends on crediting mechanism Catch up mechanisms could prove expensive What problems are encountered with highly funded policies (e.g. 5- pay to fully fund based on current assumptions at issue)? Would guarantees be needed (like those under UL) so that a policyholder would know when the contract is truly paid-up? Does ULTC help address the problem of limited pay contracts effectively becoming non-cancellable after the premium period? Barriers to adjusting current rates? 20

21 Universal LTC - Marketing What would this look like to a potential insured? Who bears the risk of a low interest rate / credited rate environment? Sample illustrations with COIs, cash value, loads, premium patterns, Illustration highly dependent on assumed premium pattern and credited rate 21

22 Universal LTC Legal, Tax and Regulatory Issues Are there any regulatory hurdles? Filing requirements Inflation protection Non-forfeiture requirements Structure of charges Limits on loads? Rate increases 22

23 Universal LTC Legal, Tax and Regulatory Issues Are there any tax hurdles? Limit on account value relative to premium (sections 7702B(b)(1)(D) and (2)(C)) Comparison with Annuity LTC combinations Use of Annuity LTC chassis Differing degrees of LTC coverage relative to annuity cash values (subject to insurance requirement imposed by the tax law) Rule for dividends and similar amounts (section 7702B(b)(1)(E)) Guaranteed renewable charges Note: State law restrictions on scheduled increasing charges after age 65; other state law restrictions on rate structure Inflation protection and nonforfeiture benefit offer, given that benefit levels may be flexible? 23

24 Universal LTC Summary and Takeaways 24