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

23  Download (0)

Full text


Session 39 PD, The Retirement Dilemma: Buying Longevity Products or

Covering Your Health Care Costs—Analysis from a Sales and Marketing



Carl A. Friedrich, FSA, MAAA



Life Annuities 101

Benny Goodman

PD 39


Life Expectancy

78? 85? 87?

Probability – 50% versus 75%


The Twin Sister Challenge - V1


Guarantee Periods

Single Life Annuity


With 10 year guarantee


With 20 year guarantee


A 20 year guarantee ensures (and insures)


The Twin Sister Challenge - V2



Investment versus Consumption

• RoR versus spending

Downside versus Upside

• Where is the real risk?

Showing income on quarterly statements


The Income Floor

Everyone has one

Social Security is not enough

Lifetime Annuity

Floor varies by income level


Things to think about


Who needs your money?

Cognitive ability


Long Term Care

Lane B. Kent, LTCP


The Long Term Care side of the Retirement dilemma

Three big questions and then some


• Why do we care?


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


• 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



Total spend on LTSS is $363 billion* estimated to be ~$1 Trillion by 2050**

Why we care; US LTSS Landscape

~7 Million covered with  Private LTC insurance  (of 309 Million = 2%) US Unfunded liabilities  ~$127 Trillion


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 2012.

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



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)


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


• 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


What can be done

Bias – 20+ years in private industry, but material involvement in public policy efforts last 10 years

Cheaper and  better product,  deeper  penetration

Societal and 


• 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


Should I buy LTC Insurance?


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


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


Should I buy LTC or Combo


 (200,000)  (100,000)  ‐  100,000  200,000  300,000  400,000 1 3 5 7 9 11 13 15 17 19 Estate Planning 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


Combination Plans


 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


The Dilemma


chronic care risk

is real and must be



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




Related subjects :