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October 01, 2002
Insurers Look to Help People Beyond Age 100
by Alan Lavine
As the population ages, insurers are adding wrinkles to life insurance and variable annuity products to serve the growing number of people who may actually live to be 100 or beyond.
Insurance companies have added maturity-extension riders to give policyholders coverage beyond 100. New guarantees protect life-insurance death benefits to age 100, no matter how the underlying mutual funds perform.
Meanwhile, immediate annuities now allow aging policyholders to tap their cash. In the past, annuitization was an irrevocable decision.
Anna Rappaport, an actuary with William Mercer of Chicago, says that more and more insurance companies are adapting policies to meet the needs of the aging population. She expects businesses that target the elderly to continue to grow as people live longer.
The number of people who are at least age 85 is expected to more than triple from a current 4.3 million to 14.3 million in 2040, Rappaport said, during a recent address before the Society of Actuaries' symposium at Lake Buena Vista, Fla. Meanwhile, 60% of those who live beyond age 85 are expected to develop some chronic disability.
"Longer life spans after retirement place an extra burden on people to adequately save for retirement during their working years," Rappaport said. "Awareness of the increasing risks of longevity will likely drive more elderly or near-elderly to seek advice from a variety of financial planners."
New-generation variable life insurance policies are reflecting the needs of policyholders with longer lifespans.
Take a new variable universal life policy offered by Phoenix Life Insurance Co. of Hartford, Conn. The Phoenix Life Edge is a survivorship life policy that insures two lives instead of one and pays a death benefit on the second insured. The policy is typically placed in an irrevocable trust, so that it is not considered part of a taxable estate. When the second spouse dies, the proceeds are used to pay estate taxes or to provide funds for the policyholder's heirs to continue a family business.
There is nothing new about survivorship life. What is new is that Phoenix Life offers policyholders an option of having a death benefit guarantee period to age 100 or for 20 years. This way, clients know their policy will not lapse even if the cash surrender value equals zero because the underlying funds have performed poorly. The average face amount of Phoenix's variable universal life is $930,000, and the annual premium is $23,000.
Jeffrey Swenson, assistant vice president of Phoenix Life's variable product distribution, says the premiums are slightly higher for those who select the death benefit guarantee to age 100. In addition, the mortality fee is three cents more per $1,000 of coverage compared to a policy without this feature. Nevertheless, age 100 is a popular rider.
"The average age of our second-to-die policyholders is late 50s and early 60s," Swenson said. "The guarantee periods are popular."
The second-to-die variable universal life policy also comes with a number of other riders, including a guaranteed insurability rider. This lets policyholders increase insurance coverage regardless of the state of their health.
Phoenix, as well as most insurers, now offer maturity-extension riders on all types of cash value life insurance coverage. This way those who live beyond 100 can continue coverage.
The reason: At age 100, a policy is endowed. That means the cash value built up in the policy over the years equals the amount of the death benefit that is paid out to beneficiaries. However, if the policy terms are not extended, income taxes are due.
"The maturity-extension rider has been popular," Swenson said. "But the 2001 CSO [Commissioners Standard Ordinary] mortality tables are likely to be adopted in 2004. So all policies will offer coverage to age 120."
Phoenix Life provides just one example of how insurers are changing their products to address the needs of people who are living longer.
Others also are responding to the trend. Nationwide Financial of Columbus, Ohio, has a "Protection Survivorship Life" policy that provides a greater focus on death benefit protection. It offers a built-in maturity extension provision beyond age 100 to assure that a customer does not outlive the policy. Unlike other insurers that offer this feature as a rider for an annual fee, Nationwide Financial bundles this protection into the product. Nationwide also guarantees that a policy will not lapse.
Commutable & Immediate
On the annuity side, several insurers, including Equitable Life Assurance Society of New York, and Hartford Life Insurance Co. of Hartford, Conn., have offered commutable immediate annuities for several years. Commutability means that policyholders can withdraw cash from their immediate annuities. That gives annuitants some assurance that if they live a long life, they can tap the cash for expenses. Typically, once an individual purchases an immediate annuity, he or she receives income for a lifetime, but can not withdraw money.
Meanwhile, Guardian Insurance and Annuity Co. of New York, recently launched an annuitization product with age 100 in mind. Guardian Investor Income Access Variable Annuity offers an option that guarantees the individual will get variable income payments to age 100. If the individual dies before 100, the balance of the payments goes to the beneficiary.
Three years ago, John Hancock Financial Services of Boston launched a long-term care insurance rider with its variable and whole life policies. The premiums for a policy with this rider are about 5% higher than a standard policy. Policyholders have a choice of using 1% to 4% of death benefits to cover the monthly cost of long-term care.
"People are living longer and the long-term care coverage is attractive," said Paul Strong, vice president of retail life products for John Hancock Financial Services. "Ten percent of our permanent policies have this option, but we expect it to rise to 33% once the rider is approved in several more states."
With people living longer, variable life insurance and annuities may help fill the retirement income void.
"Long-term care riders on life insurance are really wonderful for seniors," said Marilee Driscoll, president of the Long Term Care Institute in Plymouth, Mass. "It costs less for a long-term care rider than it does to purchase long-term care insurance."
Nevertheless, Driscoll stresses that a variable or whole life insurance policy must be structured correctly if used for long-term care. The reason is that the death benefits are reduced by the amount that is paid for nursing-home coverage.
Medicaid at Risk
Driscoll says owning insurance products becomes a problem if someone wants to pay down assets to qualify for Medicaid. Depending on state Medicaid rules, an individual cannot have more than $2,000 in assets to qualify. If they do qualify, Medicaid pays the health care bills. Annuities and insurance are considered assets if their cash values are greater than $1,500.
Someone with a large deferred annuity and cash value life insurance policy would not qualify for Medicaid.
To qualify, Driscoll says the annuity and life insurance would have to be put in the policyholder's spouse's name.
Those with immediate annuities may also run into trouble if they plan to go on Medicaid. Although an irrevocable immediate annuity contract is not part of a taxable estate, income from the immediate annuities, depending on state law, could go to the nursing home.
"Medicaid planning should be a last resort," Driscoll said. "It is better to plan in advance for long-term care coverage and income protection."
Annuity Market News
2002 IMG-Media, a Thomson Financial company. All rights reserved.
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