Fencing in the risk: medically underwritten immediate annuities are not yet a well-known product, but they may become an important tool as retiring baby boomers seek to create income or protect assets.Buyers of immediate annuities typically expect to live longer than average, and the product writers price accordingly. Now the life industry also is catering to prospects with health impairments by medically underwriting them and offering higher income payments.
According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. spiaquote.com, which specializes in marketing medically underwritten immediate annuities, at least 13 insurers offer the single-premium products that provide income for life. Among these companies are such large writers as MG American General, Lincoln National, Hartford Life, ING, Principal Financial and Prudential Financial. Each insured is underwritten separately, and the payments can be much greater for those with significant impairments. But even buyers with relatively modest impairments can expect to receive greater incomes than they would from conservative fixed-income investments or from standard income annuities.
State Life Insurance Co., a member of the OneAmerica group, has built up its business by seeking buyers who already are receiving long-term care long-term care (LTC),
n the provision of medical, social, and personal care services on a recurring or continuing basis to persons with chronic physical or mental disorders. at home or in a facility. It provides a good example of how a medically underwritten immediate annuity can play a unique role in financial planning Financial planning
Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against . "Not a whole lot of Americans have bought LTC LTC
lieutenant colonel insurance policies," said Bruce Moon, vice president of marketing for State Life. "We were looking for Looking for
In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. an opportunity to provide some type of coverage for folks who have not bought LTC policies, but then find themselves in a situation in which they are paying for ongoing costs of care." Moon said an immediate annuity provides the best leverage for the assets of someone in that situation. "That is the best way to provide some type of protection for somebody who obviously can't qualify for any pure insurance instrument."
State Life's product, ImmediateCare, was introduced in 2000, and Moon said sales have grown by about 20% a year.
The idea, he said, is "to put a fence around LTC expenses" by having the immediate annuity generate the money needed for the long-term care. That protects other assets other assets
Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. in the estate from potential erosion or dissipation by LTC costs.
An Alternative to CDs
The logic of moving a safe but low-yielding asset like a certificate of deposit into an immediate annuity is that the annuity locks in a much greater cash flow than the 5% or so that a CD might pay in today's environment. The reason is that an insurer pools the single premium an annuitant Annuitant
1. A person who receives the benefits of an annuity or pension.
2. The person upon whom a life-insurance contract is based.
1. In other words, the annuitant is the beneficiary of an annuity or pension.
2. pays with those of others. As some annuitants die, their premiums can be used to pay those still living. The older and more impaired the applicant, the greater the payment an insurer can offer. For example, as of mid-December 2006, a Lincoln National immediate annuity issued by the company's Jefferson Pilot Financial business to a 75-year-old male would have paid $863.99 a month on a $100,000 single premium. That's an annual rate of more than 10.3%, not counting compounding. Depending on a prospect's condition, medical underwriting medical underwriting Managed care The process of determining the medical needs of an individual or group before providing coverage. See Health insurance. could add 6.6% to 19.4% to each payment, taking the monthly payout to as much as $1,031.60, or the noncompounded equivalent of 12.4% a year.
Since the payments are fixed for life, an annuitant need not worry about the effects of declining interest rates. And the exclusion ratio Exclusion Ratio
The portion of the return on investments that is income tax exempt. It represents a payback of initial investments rather than capital gains.
The exclusion ratio arises mainly through different forms of non-qualified insurance annuities. of a payout annuity provides a tax advantage if the premium came from a taxable account. While the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. requires the taxable earnings from other products to be distributed first, it allows payout annuities to return some of the principal in each payment. Only after all of the principal is returned do the payments become fully taxable. Unfortunately, the code does not allow insurers to use the shorter life expectancies in medically underwritten products to determine the exclusion ratio, Moon said. If it were allowed, more principal could be returned in each payment, and the tax due would be lower.
A downside, of course, is that annuitants no longer have access to the premium paid unless they have chosen a special provision. That means if an annuitant dies soon after buying the annuity, the insurer keeps the money to pay annuitants who live. In effect, annuitants accept a short-term risk to cover a greater long-term risk.
For illustration, Moon offered a fictitious case of an ImmediateCare client with $800,000 in assets. "If she is in a care situation, especially involving Alzheimer's or Parkinson's diseases, which could involve a significant number of years in a facility or at home, there could be a serious depletion of that estate to pay those costs," he said. "What ImmediateCare allows is an option. What if we could section off $200,000, for example, to provide $5,000 a month of immediate-annuity income for the rest of her life? What that does is put a fence around that $600,000 in the estate because you know that guaranteed, no matter what happens to interest rates or to the economy, the insurance company is going to pay $5,000 a month."
The purchase of such a product is in many cases a family decision enacted through the power of attorney, said Moon. Prospective annuitants may have gotten to a physical stage, or a combination physical/mental stage, where they now have family members looking over their assets and minding their financial business, he said. The family may have analyzed what the long-term-care exposure could mean to an estate and concluded that a medically underwritten annuity makes sense to protect it "from that unknown or possibly unlimited LTC situation," Moon said. "What we've done with this product is focused on people with ADL [activities of daily living] deficiencies. That is where we can sharpen our pencils the best."
Most insurers use medical records forwarded to them by agents for the medical underwriting, but State Life sends professionals to conduct on-site assessments of applicants' physical conditions, said Moon. ImmediateCare was actually created by the Golden Rule Insurance Co. OneAmerica in late 2005 bought Golden Rule's life, annuity and LTC businesses after Golden Rule decided to concentrate on its health insurance line.
Family members can't predict how fast long-term care's costs will rise or how long their loved one will live, so insurers typically offer options for an extra charge. Moon said State Life's inflation option will increase the payments annually, while its refund option returns all or part of the premium paid. About a third of buyers adopt one or the other, but most choose the straight immediate annuity at a higher amount than the current cost of care, Moon said. "So if the cost of care today is $4,000 a month, families assume it will go up over time and buy $5,000 of income a month," he said. If more income is needed, the insured could buy an additional immediate-income annuity, according to a State Life brochure.
State Life sells the product mostly through independent financial planners and advisers who have "built trust with clients and families over the years" and who offer it as an option to liquidating assets, said Moon. "You do that, and sometimes you liquidate To pay and settle the amount of a debt; to convert assets to cash; to aggregate the assets of an insolvent enterprise and calculate its liabilities in order to settle with the debtors and the creditors and apportion the remaining assets, if any, among the stockholders or owners of the the wrong assets, or you liquidate in a stressful situation, and then you regret doing that. So the product has resonated well in the financial planning and advising world." Annuitizing conservative assets allows them to work harder, "and then you've allowed those other less-conservative investments to grow and to build, hopefully," he said.
No Strings Attached
Buyers can use the income from an immediate annuity for various purposes. Phil Elam, senior vice president of fixed annuity Fixed Annuity
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal. product management for Lincoln National, which markets as Lincoln Financial Group, said he suspects many buyers use the income to pay recurring premiums on other life or long-term care insurance policies. "The client may have already obtained certain medical information to qualify for products that are underwritten, so it's readily available to share with an annuity company to get the quote," he said. "We don't require exams and we don't pay for exams, as we do for life insurance. We consider the information applicants provide to us, so if they've already gone through the testing process and have medical information, that can make it easier for us to give them quotes and facilitate an underwritten SPIA SPIA Single Premium Immediate Annuity
SPIA School of Public and International Affairs (Virginia Tech)
SPIA Standards Profile for Imagery Access
SPIA Small Payload Interface Adapter
SPIA Scanner Power Interface Assembly [single premium immediate annuity] ."
Buyers with medical conditions See carpal tunnel syndrome, computer vision syndrome, dry eyes and deep vein thrombosis. typically pay higher premiums for life and LTC insurance policies. These higher costs can be partially offset by the higher income payments provided by an underwritten SPIA, Elam noted.
Lincoln National's product, the Jefferson Pilot Insured Income SPIA, was introduced about two years ago, before the companies merged. Lincoln distributes them primarily through its channel of independent insurance agents. To date, there has not been much interest from bank distributors, broker/dealers or wire-house producers, said Elam.
Insured Income is available as either a standard or an impaired-risk SPIA, and Elam said the company doesn't report sales of those versions separately. But income-annuity sales are "up noticeably this year and last year," he said, and they constitute about 10% of the company's fixed-annuity sales overall.
Elam observed that people are increasingly turning to annuities for income, and much of that is going on without having to annuitize. But the traditional fixed income annuity "will probably continue to provide the highest guaranteed income," Elam said. "And then, where there are health impairments, the ability to get the benefit of underwriting credits is both valuable to the client and equitable from the standpoint of the insurer and the client."
Elam said the major part of the business is not in severe impairments. "It's more a matter of somebody getting credit for an impairment that can shorten life expectancy on average but does not reduce life expectancy to such a degree that longevity is no longer a concern," he said. "I would think advisers and insurance agents are often involved in identifying when an income annuity can fit and serve the needs of a client. It's part of an overall set of solutions."
American General Life Insurance Co.'s immediate annuity is the Platinum Income Annuity. It has been on the market for about five years, said Thomas Booker, president of AIG AIG addressee indicator group (US DoD)
AIG American International Group, Inc
AiG Answers in Genesis (religious group in defense of Scripture)
AIG Artificial Intelligence Group
AIG Australian Industry Group American General's Annuity Profit Center. Sales have been growing each year, but faster growth is dependent on more education for distributors, Booker said. "Brokers that use it understand it, but there's still a large contingent out there that doesn't understand it," he said.
American General, a member of American International Group
American International Group, Inc. (AIG) (NYSE: AIG; TYO: 8685 ) is a major American insurance corporation based in New York City. , sells medically underwritten annuities primarily through its independent brokerage general agents, personal producing general agents and independent marketing organizations. Fewer are sold through wirehouse broker/dealers.
Product Awareness to Grow
Booker said medically underwritten immediate annuities have been on the market for about 12 years and may be about a third of the way through the product-development phase. Compared to other industry products, however, they remain obscure, and Booker said he's not aware of any industrywide statistics about them. According to the National Association for Variable Annuities Variable annuities
Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. , Morningstar and Limra International, insurers sold $11.8 billion of immediate annuities of all kinds in 2005.
Booker, however, sees better sales ahead as major companies, including American General, spend more time on educating producers and as baby boomers See generation X. mature. Buyers of medically underwritten immediate annuities are typically 60 to 65 years old on the low end and 80 to 85 years old on the high end, Booker said. "As the baby boomers move into retirement, there will be more focus on both standard and medically underwritten immediate annuities," he said. "The more carriers, marketing initiatives and awareness you see out there will help the market overall."
State Life's Moon said he expects medically underwritten annuities to become commonplace over the next decade. "As more planners, independent agents and companies find that there is always a segment of the population that will not or cannot buy LTC insurance, there is still something our business has to do for those folks that do not have that coverage and enter a facility or have home care," he said. "We're just at the beginning of people noticing these products are out there."
Elam of Lincoln National said there is a growing need for income solutions, and he expects to see a lot of innovation in this area. However, there will continue to be a need for the traditional income annuity, with appropriate underwriting, "because what it does, it does very well, namely to provide the maximum guaranteed lifetime income."
Medically underwritten annuities may currently be niche products, but they bring in hefty premiums per sale. State Life sets its minimum premium at $25,000 or the amount necessary to produce $1,000 in monthly income payments. Lincoln National sets its minimum at $100,000. "From the standpoint of purchasing a lifetime income, $100,000 is not too onerous a requirement," said Elam. "It's something we have to use to protect the pricing, and there's a certain amount of expense in generating the quotes." Elam added that the single premiums of income annuities average more than $200,000.
* Medically underwritten immediate annuities pay more than standard immediate annuities by factoring in health impairments.
* As baby boomers age, these annuities are likely to become tools in retirement planning Retirement financial planning refers to a collection of systems, methods, and processes which, in their aggregate, support a family unit's (client's) desire to achieve a state of financial independence, such that the need to be gainfully employed is optional. and even estate preservation.
* Though currently a niche in the small immediate-annuity product line, medically underwritten annuities are usually bought with extremely large premiums.
What Constitutes a Serious Medical Condition?
The following are some, but not all, of the diseases that could qualify a prospect for a medically underwritten immediate annuity.
Alzheimer's Alcoholism ALS Als (äls), Ger. Alsen, island, 121 sq mi (313 sq km), Sønderjylland co., S Denmark, in the Lille Bælt, separated from the mainland by the narrow Alensund. (Lou Gehrig's Disease Lou Geh·rig's disease
See amyotrophic lateral sclerosis. ) Angioplasty or Heart Surgery Cancer (except basal cell basal cell
A type of cell found in the deepest layer of the epithelium. ) Chronic Hepatitis/Hepatitis C Congestive Heart Failure congestive heart failure, inability of the heart to expel sufficient blood to keep pace with the metabolic demands of the body. In the healthy individual the heart can tolerate large increases of workload for a considerable length of time. Cirrhosis of the Liver Cirrhosis of the liver
A type of liver disease, most often caused by chronic alcohol abuse. It is characterized by scarring of the liver, which leads to an increase in the blood pressure in the portal veins.
Mentioned in: Bleeding Varices Diabetes with Complications Emphysema/Chronic Obstructive Pulmonary Disease Heart Attack, Angina, Heart Disease High Blood Pressure Hodgkin's Disease Hodgkin's disease, a type of cancer of the lymphatic system. First identified in 1832 in England by Thomas Hodgkin, it is a type of malignant lymphoma. Incidence peaks in young adults and the elderly. Injury Due to Fails or Imbalance Leukemia leukemia (lkē`mēə), cancerous disorder of the blood-forming tissues (bone marrow, lymphatics, liver, spleen) characterized by excessive production of immature or mature Liver Disease Liver Disease Definition
Liver disease is a general term for any damage that reduces the functioning of the liver.
The liver is a large, solid organ located in the upper right-hand side of the abdomen. Lymphoma Melanoma or Metastatic Cancer Metastatic cancer
A cancer that has spread to an organ or tissue from a primary cancer located elsewhere in the body.
Mentioned in: Liver Cancer
metastatic cancer Mental Illness Multiple Sclerosis Muscular Dystrophy muscular dystrophy (dĭs`trōfē), any of several inherited diseases characterized by progressive wasting of the skeletal muscles. There are five main forms of the disease. Obesity with Complications Organ Transplant organ transplant: see transplantation, medical. Organic Brain Syndrome organic brain syndrome
n. Abbr. OBS
Any of a group of acute or chronic syndromes involving temporary or permanent impairment of brain function caused by trauma, infection, toxin, tumor, or tissue sclerosis, and causing mild-to-severe Paraplegia paraplegia (pâr'əplē`jēə), paralysis of the lower part of the body, commonly affecting both legs and often internal organs below the waist. When both legs and arms are affected, the condition is called quadriplegia. or Quadriplegia quadriplegia: see paraplegia. Parkinson's Disease Renal Failure renal failure
Acute or chronic malfunction of the kidneys resulting from any of a number of causes, including infection, trauma, toxins, hemodynamic abnormalities, and autoimmune disease, and often resulting in systemic symptoms, especially edema, Stroke Transient Ischemic Attack Transient Ischemic Attack Definition
A transient ischemic attack, or TIA, is often described as a mini-stroke. Unlike a stroke, however, the symptoms can disappear within a few minutes. Vascular Disease
American General Life Insurance Co. A.M. Best Company # 06058 Distribution: Personal producing general agents, brokers, independent marketing organizations, agency system
Jefferson Pilot/ Lincoln National A.M. Best Company # 06928 (Jefferson Pilot Life Insurance Co.) Distribution: Independent general agents, national marketing firms, career agents, broker/dealers, banks
State Life Insurance Co. A.M. Best Company # 07082 Distribution" Independent financial planners, company general agencies, brokers, registered representatives
For ratings and other financial strength information about these companies, visit www.ambest.com.
Annuity Industry Total Sales-Deferred vs. Immediate ($ Billions) Year Deferred Immediate Total 1996 $107.0 $5.3 $112.3 1997 120.8 5.6 126.4 1998 126.2 5.6 131.8 1999 158.0 6.7 164.7 2000 181.4 8.6 190.0 2001 177.4 10.2 187.6 2002 207.1 11.2 218.3 2003 204.5 11.3 215.8 2004 205.9 11.7 217.6 2005 200.5 11.8 212.3 Source: NAVA, Morningstar, Inc., and LIMRA International