The New L-H Landscape: Where Do You Fit?

Only 25% of independent agencies write group medical insurance, according to the 2014 Future One Agency Universe Study. But whether or not your agency is involved in the “health” side of life-health, you need to understand these market trends to best position your agency for the l-h cross-sell.

Low Interest Rates and LTCi

Despite the consensus of most economists, interest rates did not increase in the second half of 2014 but rather experienced a slight dip—creating a challenging situation for insurance companies with a significant portion of reserves in fixed income investments like U.S. and corporate bonds. In particular, low interest rates continue to adversely impact long-term care insurance. As a result, fewer carriers offer LTCi—and those that do have raised rates on a “class” basis, creating negative consumer sentiment for the product. Meanwhile, whole life insurance policies containing a minimum interest rate guarantee have had to decrease the floor rate and/or increase premiums.

Savvy independent agents can craft LTCi riders to life insurance and annuities products—a tax-efficient option for paying for LTCi expenses while addressing the concerns of prospects who don’t want all their savings to go exclusively to LTCi, without the opportunity to use funds for retirement savings or providing a death benefit can craft. But agents should be sure to discuss a client’s “internal rate of return” when deciding whether buying an LTCi policy outright or using a rider best satisfies the client’s objectives in a cost-effective manner.

Agents should also note that LTCi policies can provide more tailored coverage provisions—especially with regard to the definition of “benefit triggers,” which relate to the activities of daily living and allowable expenses incurred by the policyholder.

Advances in Life Expectancy

The Society of Actuaries finalized their revised actuarial tables at the end of 2014, now indicating the average 65-year-old U.S. woman will live to 88.8 years (up from 86.4 in 2000) while a man of the same age will live 86.6 years (up from 84.6 in 2000)—representing a 10% increase
in longevity.

It may be good news, but it highlights an increasing concern for Americans planning for retirement: longevity risk, or the risk that a person or couple will outlive the financial resources necessary to provide a desired standard of living in retirement. Since retirees typically have a conservative investment portfolio, with a majority of their assets in interest-bearing accounts, the increased average lifespan coupled with low interest rates creates a degree of anxiety around the age at which a person can feasibly retire.

Life insurance companies are uniquely positioned to guarantee a lifetime income stream using annuities, and several carriers now offer longevity insurance—with more expected to follow. For a 65-year-old female, $100,000 in longevity insurance coverage provides about $60,000 a year of income beginning at age 85. For a male of the same age, the same amount of money provides about $48,000 a year of income starting at age 85.

During 2014, the U.S. Treasury issued an important ruling that will boost the use of longevity annuities, which allow plan participants to use up to 25% of their account balance or $125,000, whichever is less, to buy a longevity annuity without concerns about non-compliance with the age 70.5 minimum distribution requirements.

For agencies that want to offer retirement planning services, a key consideration involves licensing and the resulting compliance pertaining to the products they offer. In light of the increasing oversight of broker/dealers over the past several years, a number of agencies have dropped their securities licensing and no longer sell mutual funds, variable life insurance and variable annuities. But this shouldn’t mean that an agency must exit the playing field. Offering longevity insurance annuities, immediate lifetime annuities and LTCi can provide meaningful revenue while serving an important need for the agency’s personal lines clients and business owners and their employees.

ACA Evolution

Assuming the new Congress does not dramatically alter the Affordable Care Act (ACA), most agencies have already made the decision whether or not to focus resources on helping clients navigate the myriad of rules and requirements. The minimum loss ratio thresholds promulgated by the ACA have adversely affected commission levels, resulting in the vast majority of agencies putting a stop to individual medical insurance offerings.

A smaller percentage of agencies are staying involved as an avenue to drive new business by cross-selling other insurance products. For the individual insurance market, the ACA’s offerings on healthcare.gov have prompted many consumers to buy health insurance on a direct basis rather than through an agent.

The climate for agents offering group health insurance is different in each state based on the state exchanges. The goal of businesses broadly utilizing the small business health options program (SHOP) has fallen flat. In the 18 states that run their own small business marketplaces, only 76,000 people enrolled through June 2014—far short of the 2 million SHOP customers Congressional budget analysts forecasted. Federal officials have not released the number of participants for the 32 states participating in the federally run small business marketplace. Agents and employers alike were well aware that their rate renewals for 2015 were dramatic, many experiencing double-digit increases that made it difficult for the business and employees to absorb.

Agents should also advise commercial clients that employers face two potential penalties in 2015. The first is a “no coverage” penalty for employers with more than 50 full-time equivalent (FTE) employees that do not offer minimum essential coverage to substantially all FTEs—triggered if one employee goes to a federal or state health plan exchange and qualifies for a subsidy. The penalty is $2,000 per FTE, minus the first 30 FTEs.

The second is an “insufficient coverage” penalty, based on the ACA requirement that employers offer a stipulated “minimum” value to employees in their health plans. A health plan meets this standard if it is designed to pay at least 60% of the total cost of medical services for a standard population and at least one option offered to an employee does not exceed 9.5% of the employee’s household income. The insufficient coverage penalty is $3,000 for each employees who receives a subsidy on a public health insurance exchange.

Employers with 50-99 FTEs are not subject to penalties in 2015. Also, the requirement that employers offer coverage to at least 95% of FTEs has been modified to 70% of FTEs for 2015. But while this modification may provide relief for the “no coverage” penalty, employers may still incur an “insufficient coverage” penalty.

ERISA and Medical Stop-Loss

Agents with clients that self-fund their insurance must pay particular attention to the Department of Labor’s (DOL) recent pronouncement indicating the ERISA pre-exemption does not override a state insurance department’s ability to regulate medical stop-loss insurance in their state. In November, the DOL gave states the green light to regulate stop-loss coverage, mandating states may enact laws specifying minimum stop-loss attachment points. According to the DOL, “a State law that prohibits insurers from issuing stop loss contracts with attachment points below specified levels would not, in the Department’s view, be preempted by ERISA.”

Relatively high minimum stop-loss attachment points could result in preventing smaller- and medium-sized businesses from self-funding their medical insurance plans, renting provider networks and using TPAs to administer claims. States like California have minimum stop-loss thresholds and more states could follow suit in the future to force smaller, healthier businesses back into the conventionally insured marketplace—then those plans will benefit from these employee populations, preventing “skimming” from the exchanges.

In addition to new opportunities, independent agents should not overlook traditional offerings of individual and group life insurance, disability and dental insurance. Agents should review their agency’s mix of business and capabilities to determine which life-health products best compliment their resources. A variety of carriers and MGAs are willing to partner with independent agencies to help them grow their revenues while serving their clients. Don’t miss out on turning these trends into opportunities.

Dave Evans is a certified financial planner and an IA contributor.