To the rescue: hoping to revive long-term-care insurance sales, the industry is trying new combination products.

[ILLUSTRATIONS OMITTED]

Long-term care continues to be a largely uninsured risk in the United States, but insurers are enthusiastic about the potential for a new generation of so-called combination policies now in development. These products will add long-term-care insurance to the chassis of either life insurance or annuity policies.

Speaking at April's Life Insurance Conference in Las Vegas, Marianne Purushotham said that 15 companies currently offer LTC benefits with individual life insurance products. Six more offer them with annuities.

But more are on the way, said Purushotham, a research actuary with Limra International.

The first stand-alone LTC product came on the scene in 1965, but despite being actively marketed in the past 20 years, LTC has achieved very low market penetration. Slightly more than 7 million Americans are insured against long-term-care--less than 10% of the potential market, Purushotham said.

These disappointing sales have occurred despite the current and future need for long-term care. The American Health Care Association predicts that, at some point, half of all Americans will need LTC services. Of those living to age 65, 40% will spend some time in a nursing home, AHCA said, and 70% will need some form of home health care.

[ILLUSTRATION OMITTED]

Individual stand-alone LTC policy sales took a major hit in the past five years as insurers found it necessary to raise premiums for new business, and in some cases for existing business. Sales as measured by premium fell four consecutive years from 2003 to 2006, including a 25% drop in 2004.

They rebounded last year by 3%, though the number of people insured by those sales dropped 1%, according to Carl Friedrich, consulting actuary and principal with consulting firm Milliman Inc. In 2006, only 9% of LTC costs in the United States were paid by insurance, according to the federal Centers for Medicare & Medicaid Services. More than haft was paid by Medicare and Medicaid, and about 22% was paid privately, the agency said.

A number of factors drove the turmoil in the market in the past few years, according to Friedrich. For one, insurers overestimated lapse rates, which have been extremely low--less than 2% of policies annually. In addition, low interest rates made it difficult for insurers to earn decent returns on premiums. Mortality rates also came in lower than expected.

Rate increases on existing business put producers in the unpleasant position of explaining them to unhappy clients, Friedrich said. Producers also have had to deal with product complexity and with rates on new products that are 25% to 40% higher than levels of five years ago, he said.

Added to this witch's brew is consumers' basic objection to stand-alone LTC policies: that they might pay decades of premiums and never file a claim.

[ILLUSTRATION OMITTED]

This is where combination products start to look attractive. At the heart of combo product design is the fact that buyers will eventually receive some benefit--which focus groups conducted by Limra cited as a plus.

In life insurance/LTCI combos, insureds can accelerate access to the death benefit if they need long-term care. Beneficiaries receive either the full death benefit or what remains if the policy has been tapped for long-term care. Some contracts offer amounts greater than the death benefit to pay for long-term care, and even if the death benefit is exhausted by LTC expenses, some products offer a residual death benefit payable to beneficiaries.

In fact, the purchase of a combo product is usually a repositioning of existing assets that the client had saved to pay for LTC expenses, often from such conservative investments as certificates of deposit. Bruce Moon, vice president of The State Life Insurance Co., said 80% of his company's customers buy its combo whole life/LTC policy, Asset-Care, with large, single premiums.

The single payment also eliminates the risk of annual premiums going up.

"You don't want to have to raise the premiums on somebody who is 78 years old and has had the policy for many years," he said. "Instead, they can see that their cash values have grown, that maybe their benefits are up a bit, and that they have the option to walk away with their money plus interest."

Legislative Spark

Helping to spur interest in combo products is the clarified tax treatment included in the Pension Protection Act of 2006. Moon said that the PPA could be a tipping point for development of combo products in the way that rising gasoline prices have spurred sales of hybrid cars.

According to Friedrich, the two big changes wrought by the PPA are clarifications that qualified benefits won't be subject to federal income tax, and that exchanges into LTC insurance contracts will be tax-free when they come from other insurance products (known as 1035 exchanges under Section 1035 of the tax code).

Most benefits paid from life contracts were already tax-free, but the PPA broke ground by making them tax-free from annuity contracts as well. (The effective date for most of the new rules is Jan. 1, 2010, but the products can be sold today, Friedrich said.)

Over the past year, most of the sector's enthusiasm has revolved around annuity/LTC designs, he said. Two-thirds of Milliman's clients focused on annuity/LTC combos rather than life insurance/LTC designs, he said.

In deferred annuities, a simple design would waive surrender charges if withdrawals are for long-term care. More-complicated designs would provide benefits in excess of account values.

For these greater benefits, policyholders would be charged a fixed level of basis points annually against the account values. Since underwriting on annuities is limited, Friedrich said companies will likely reduce "anti-selection" of applicants--those in questionable health--by imposing waiting periods of two to even seven years before benefits can be paid.

State Life introduced its first combo life/LTC product in 1989. Over the years, State Life has become more comfortable in underwriting the product, Moon said. The maximum issue age has risen from 72 to 80, and declines of submitted applications have fallen from the 30%-to-35% range to less than 10% today, Moon said. Today, with experienced underwriters, a comfort level with geriatric underwriting and knowledge of claims exposure, the company would like to raise the maximum issue age even more, be said.

Despite State Life's long record with combo products, Moon said the regulatory process remains a continuing challenge. Product approvals can take six to nine months in the less stringently regulated 25 states and 18 to 24 months in the more closely regulated states, he said.

Limra's Purushotham said insurers continue to face product, marketing and underwriting challenges. For example, greater product flexibility means greater complexity, but she said there is an advantage to keeping product designs simple. "The life base plan is already complex," she said.

The industry, she added, also needs to be "very careful" about suitability. A key consideration in explaining products to prospects is making sure they understand they are not buying both life insurance and LTC coverage. Rather, the coverages come from the same benefits pool, Purushotham said.

* The Trend: More companies are creating products that combine life insurance or annuities with long-term-care insurance riders.

* Behind the Trend: Stand-alone LTC products have failed to penetrate a market that increasingly needs such insurance.

* Watch For: More combo products from more companies to emerge from the product-development pipeline.

Learn More

State Life Insurance Co.

A.M. Best Company # 07082

Distribution: Career agents, independent brokers, registered representatives, banks, personal producing general agents

For ratings and other financial strength information visit www.ambest.com.

[GRAPHIC OMITTED]

Long-Term-Care Sale Trends

Individual LTC Insurance Sales

LTCI sales rebounded in 2007 after four difficult years, but lives
covered are still down.

           2003    2004    2005    2006    2007

Lives      -11%    -29%     -8%    -10%     -1%
Premiums    -7%    -25%     -5%     -8%      3%

Source: Limra International, Individual LTC Insurance (2007, 4th
quarter review)

Note: Table made from bar graph.

Stand-Alone LTCI Writer Predictions

Writers of stand-alone products predict that combination products
will increase more than five-fold to 26% of the market.

In the Near Term

Combination Plans      5%
Voluntary Plans        3%
Group Employer Paid    6%
Multilife Plans       14%
Individual Plans      72%

In the Future

Multilife Plans        5%
Individual Plans      23%
Combination Plans     26%
Voluntary Plans       15%
Group Employer Paid   31%

Source: Limra International, Frustrated, Tenacious: LTCI Industry
Looks to the Future 2006

Note: Table made from pie chart.

Estimated 2006 Sales,
Life with LTCI

Life/LTCI combination products still
make up a small portion of the total
LTCI market, which topped $1 billion
in 2002 before dropping below $700
million in 2005 and lower in 2006.
Note: The life industry usually counts
10% of payments for single-premium
products when calculating annual
premiums for a product line.

                                 Industry Estimate

Total Policies Sold                         10,500
Total Annual Recurring Premium         $30 Million
Total Single Premium                  $350 Million
Average Size                              $200,000

Source: Limra Combination Product Research

[ILLUSTRATION OMITTED]

How Long-Term-Care Riders Work

Immediate annuities with long-term-care riders can add significant
value by enhancing payouts when LTC benefits are triggered.

A 60-year-   At age 80      Without an     With an          But the
old woman    she needs 25   LTC rider,     LTC rider        contract
buys a de-   months of      her annuity    that pays up     would pay
ferred       long-term      value by       to 150% of       $360,000 in
annuity      care.          age 80         asset value      LTC bene-
with                        would stand    and costs        fits-poten-
$100,000.                   at $265,000.   her 50 basis     tially tax-
                                           points of        free under
[ILLUS-       [ILLUSTRATION OMITTED]       asset value      product
TRATION                                    per year,        designs
OMITTED]                                   the annuity      that comply
                                           would have       that tax
                                           grown to just    law re-
                                           $240,000         quirements.
                                           by age 80 ...

Source: Milliman Inc.