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November 17, 2005
Financial innovation
Not all innovations are technological. An example of a financial innovation comes from David Wessel in today's Wall Street Journal "Insurance Helps Balance Risk in Retirement"
A band of think-tank economists, who believe many more people should buy annuities and long-term care insurance, argue that consumers and insurers would find such products more attractive if they were bundled together.
"Such a product could offer economic security for retirees by providing a steady steam of income combined with protection in the event of catastrophic costs associated with disability," Mark Warshawsky, a pension scholar who is now assistant Treasury secretary for economic policy, has said. A couple nearing retirement might, for instance, put a chunk of their savings into an annuity that offers a set monthly sum, adjusted for inflation, and an extra payment if husband or wife needs long-term care.
. . .
One big advantage: Such a product wouldn't force a couple to buy stand-alone long-term care insurance at retirement, when most are reluctant. But it would make coverage available later when buying it would be prohibitively expensive or impossible. It also might overcome consumers' widespread reluctance to buy conventional long-term care insurance. "They say: I don't like that because I've got to continue to pay premiums and I have to lose to win, and that doesn't make sense," says John Connelly, a marketing executive at Genworth Financial Inc., an insurer recently spun off from General Electric Co.
For insurers, combined products offer another advantage: "We pool populations with two different risks: individuals who are likely to be long-lived and individuals who are in relatively poor health," Mr. Warshawsky has said. As a result, he and colleagues figure the price of a combined product could be 3% to 5% lower than buying them separately.
Even more important, insurers would sell a combo to people to whom they won't sell long-term care insurance. Insurers fear folks who buy nursing home coverage are those with reason to believe they are going to need nursing-home care. So they price the policies accordingly or refuse coverage to people with minor health problems.
Insurers do offer life-insurance and long-term-care combos; most allow you to collect your death benefit before death if you end up in a nursing home. But few combine annuities and long-term care. The tax code is one big obstacle; it generally treats annuity payments as taxable and benefits from long-term care policies as non-taxable. A little-noticed provision in a pension bill likely to pass the House soon would remove this obstacle.
Now, combine that with a reverse-mortgage that allows all those seniors to use that equity in their home to buy these combos, and we might go a long way to easing some of the economic anxiety facing us aging baby-boomers.
Posted by Ken Jarboe at November 17, 2005 5:45 PM
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