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Billiondollar chance: OneAmerica foresees huge growth opportunity in long-term-care policies thanks to new tax breaks

August 25, 2008

That's when new tax benefits kick in for an unusual kind of long-term-care insurance, called asset-based longterm care.

The Indianapolisbased life insurer is betting those tax breaks send a wave of money flooding toward asset-based long-term-care policies, which one of its subsidiaries has sold for nearly 20 years.

With people living longer and the 70 million baby boomers aging, the need to pay for long-term care, such as in-home elder care and assisted-living facilities, is sure to rise.

"We see this as a billion-dollar opportunity," said OneAmerica CEO Dayton Molendorp.

OneAmerica honchos think they can ramp up to that much in annual premiums three years after the tax breaks kick in. Such growth would be phenomenal for OneAmerica, which wrote $344 million in premiums last year.

Typical long-term-care insurance works more like health insurance, with customers paying monthly premiums and the insurer promising to pay bills from medical providers based on a menu of qualified services.

Asset-based long-term-care insurance allows money held in an annuity or a life insurance policy to be spent for long-term care, if the policyholder chooses to do so.

The tax benefits exciting OneAmerica were part of the Pension Protection Act of 2006. It allows holders of annuities and life insurance policies to withdraw money from them-tax free-if they spend the money on the costs of long-term care or premiums for long-term-care insurance.

Currently, if a holder of annuity transferred money to a long-term-care policy, he would pay taxes on the investment gains his annuity had earned over the years. The same is true if a customer bought a long-term-care policy using money from a bond fund, certificate of deposit or other investments.

Already, OneAmerica is the secondlargest provider of asset-based long-termcare insurance, behind Philadelphiabased Lincoln National Corp. Other players include New York Life and Genworth Financial.

OneAmerica's subsidiary that sells asset-based long-term-care products, The State Life Insurance Co., wrote $200 million in premiums on those policies last year.

As of March, Americans held $1.94 trillion in annuity accounts, according to LIMRA International, a trade association of life insurance companies.

But it's not clear if the tax breaks alone will send a rush of that money flowing into long-term-care policies, said Tom Rosendale, a financial analyst at A.M. Best Co., a New Jersey-based insurance rating agency.

"My sense is that companies aren't going to commit until they see that this begins to take off as a market segment," he said. But if it does, he added, OneAmerica will quickly face competition from financial services giants that dwarf it in size.

OneAmerica customer George Maley eventually decided asset-based longterm-care insurance worked for him.

The former owner of Indianapolisbased National Underwriters Inc. plunked down $52,000 to buy a State Life annuitybased long-term-care policy for him and his wife. He's also paying $5,000 a year for three years to get the maximum level of covered benefits and inflation protection up to 5 percent a year.

Maley, 76, took the $52,000 out of short-term securities he held, such as certificates of deposit, which were earning about 6 percent a year. OneAmerica's AnnuityCare policy will pay him 3 percent a year on his money.

"Having seen people of my age running into this problem [of paying for long-term care], I said, 'It's best to get a look at it,'" said Maley, referring to asset-based longterm-care policies. He added, "It was a shifting of monies to get this thing taken care of. It has worked out well for me."

OneAmerica's asset-based long-termcare policies have snagged at least one other insurance executive: Molendorp.

After he and his wife built an addition on their house so they could care for his mother-in-law, Molendorp began looking at his own planning for longterm-care coverage.

The 61-year-old took some money he had set aside in safe accounts to buy a life insurance version of the asset long-termcare policy. The policy provides a $600,000 death benefit, but also allows for as much as $11,000 a month to go toward long-term care, if Molendorp or his wife needs it.

To find more customers like that, OneAmerica plans to double or even triple the number of its sales personnel, or producers, over the next five years.

Negative history

Those sales personnel will have their work cut out for them. Some customers cringe when they hear "long-term-care insurance" because the early versions of health-based products have gotten a black eye.

Carmel-based Conseco Inc. provides a case in point. Long-term-care policies it acquired from other companies in 1996 and 1997 were woefully under-priced. The rates on the policies weren't guaranteed, so Conseco has repeatedly asked state regulators to approve premium rate increases, including $106 million of annual hikes in the last two years.

In addition, by the end of this year, Conseco will have spent nearly $1.1 billion to shore up reserves for its older long-term-care policies. Newer policies have run into fewer problems.

Conseco also got into trouble with several states and Congress when consumer complaints mounted about its claims processing and denial habits. In May, the company agreed to pay up to $6.3 million in fines and restitution to settle a multistate investigation into its handling of claims, complaints and marketing of its long-term-care policies.

"You do a Google search on long-term care, you know, you find a lot of negative things out there," said Bruce Moon, vice president of marketing for State Life. "The challenge that we have is to distinguish our product from others that are out there."

OneAmerica may also have a challenge convincing financial advisers who like long-term-care policies. Teresa Eagan, an Indianapolis insurance agent that specializes in long-term care, said she doesn't see the benefits of asset-based products.

The selling point for asset-based policies is that all the premiums a customer pays get him long-term care if he needs it. And if the customer doesn't need longterm care, he still hasn't thrown away his premiums-he has an asset in the form of an annuity or a life insurance policy.

But Eagan noted that 70 percent of Americans will need long-term care in their lifetime.

"To me the question is, 'What if you do use it?' not, 'What if you don't?'" said Eagan, who is the owner of LTCA Inc. in Indianapolis. She added, "I just have not yet gotten comfortable with the hybrid asset-based products."

She advocates customers buy only long-term-care policies that qualify with the Indiana Long Term Care Insurance Program. Those policies require 5 percent inflation protection and, if the policyholder outspends the limit on the policy, the program protects the person's assets up to the value of the policy he bought.

"I think it's the most economical way to pay for long-term care," Eagan said.

Not for everybody

Molendorp acknowledges that assetbased long-term care isn't for everyone. And he's careful to say there's still a place for health-based long-term care.

But for people with an annuity sitting around or with substantial assets to protect, he's confident asset-based policies are the way to go.

"For people with assets, at least it ought to be on the table as an option," he said.

OneAmerica bought its way into the asset-based long-term-care business in 2005 when it acquired the financial services division of Indianapolis-based Golden Rule Insurance Co.

Golden Rule was one of the pioneers of asset-based long-term-care insurance when it launched its first product in 1989, said Moon, a former Golden Rule employee.

Most of the 100-person Golden Rule team is still in place, which should help State Life know how to price, promote and profit from these products, he said.

"They know a lot more about how these products work and what makes sense than other companies that are just starting out," Moon said. "Those are things that we don't have to guess at."

Rosendale from A.M. Best acknowledged that few companies have positioned themselves to capitalize on assetbased long-term-care policies as much as OneAmerica.

"If anybody's in a position to take advantage of it," he said, "they'd be one of them."
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