Tag Archives: Carl Friedrich

Annuity alchemy

A new article in LifeHealthPro looks at the hybridization trend as it applies to retirement. Here’s an excerpt:

It’s crept onto your restaurant menu, into your pocket and your retirement portfolio, too. It’s called hybridization—taking distinct elements of one item and combining them with distinct elements of another to yield another distinct multifaceted product. Use that recipe in the culinary world and you get fusion food. Use it in the high-tech arena and the result is an all-in-one device called a smartphone. Apply it to financial and insurance instruments, and to annuities in particular, and the possibilities are seemingly endless.

The drive to innovate and deliver versatile solutions that address multiple client needs has put annuity providers in full hybridization mode. From the structure of the contract chassis itself, on down to other, more granular aspects of their products, insurers are borrowing and blending elements of various insurance and financial instruments to put a unique spin on their annuity offerings.

“Really what they’re doing,” explains Tim Hill, FSA, MAAA, principal and consulting actuary in the Chicago offices of Milliman, an actuarial consulting firm that provides insurance companies with product development guidance, “is mining these features from other things and using them with annuities. That approach seems to rule the annuity marketplace today.”

The result is an influx of specialized, sometimes complex products with hybrid structures, hybrid compensation models, hybrid benefits, even hybrid hedging strategies.

For advisors, this proliferation of hybrid annuity products and features means having a wider range of potential solutions to offer clients. But it also means more product education, observes Hill’s colleague Carl Friedrich, FSA, MAAA, also a principal and consulting actuary at Milliman. “There’s a real learning curve [annuity producers] need to climb when they’re working with some of these [hybrid] products.”

The full article is available here.

How can an annuity fund long-term care?

The Chicago Tribune poses, and answers, this question:

Q. My wife and I are 84 and considering a retirement home. I read about a provision in the Pension Protection Act that would allow long-term care costs to be paid tax-free through an annuity. We have an annuity with a surrender value of more than $300,000. What part of this could help us pay our monthly bill?– R.M.

A. First, you need to evaluate whether you would owe taxes on annuity withdrawals, said Montgomery Taylor, an accountant and financial planner in Santa Rosa, Calif.

If the value of your contract is down to basically what you put into it (all too common these days), you could owe no tax, and thus have no need for a tax break, Taylor said.

That said, the Pension Protection Act of 2006 did create a tax break for annuity owners that began this year. While you don’t get a break on direct long-term care costs, you can qualify for tax-free annuity withdrawals that are used to pay for long-term care insurance premiums. If you end up needing the insurance, your coverage could equal two to three times the value of the annuity policy, experts said.

Some hybrid annuity/long-term care products have been available in recent years, though several insurers are developing new products to take advantage of the provision, said Carl Friedrich, a principal with Milliman, an insurance industry consulting firm.

Annuity/LTC hybrids gain traction

A part of the healthcare reform bill, the CLASS Act, has attracted a lot of attention, though there’s already significant change afoot in long-term care (LTC) as an employee benefit. Employee Benefits News picks up on the story:

Before the Community Living Assistance Services and Supports Act folded into landmark health care reform legislation raised public consciousness of long-term care insurance, LTC got a shot in the arm with provisions of the Pension Protection Act (PPA) that took effect this year.

So-called combo long-term care products, which blend LTC with annuities and life insurance, could be popularized under changes to the PPA because of clearer pricing. Carl Friedrich, a consulting actuary and principal for Milliman, also has noted that the LTC portion of a combo plan often costs 35% to 50% of standalone coverage.