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Department of Labor and Department of the Treasury 

Re: RIN 1210 – AB33 

Request for Information Regarding Lifetime Income Options for Participants and 

Beneficiaries in Retirement Plans 

These comments are submitted by Cary Lakenbach FSA, MAAA. These 

comments represent my personal comments and do not reflect the views of any 

group that I am currently or have been affiliated with. Information about me is 

included as Exhibit A. 

I wish to commend the Department of Labor and the Department of the Treasury 

for issuing this Request for Information. These issues are complex and 

particularly important to individuals who have only DC plans. 

Question 15 requests commentary regarding the advantages and disadvantages 

of approaches that combine annuities with other products, and requests 

guidance regarding heir prevalence in the marketplace. 

My firm, Actuarial Strategies, and I have specialized in the area of combination 

life and long term products for some fifteen years, and specialized in the area of 

combination annuity and long term care products since approximately 2003. We 

believe we are a leading developer of such contracts within the United States. 

These time frames are primarily tax act related. HIPAA, the Health Insurance 

Portability and Accountability Act of 1996, became effective in the beginning of 

1997. While the provisions of the Act are broad, the specific provisions of 

interest here gave rise to the definition of a Qualified Long Term Care Insurance 

Contract (QLTCI). HIPAA stated that both standalone long term care insurance 

contracts (i.e., contracts which only cover long term care needs) and 

appropriately defined riders to life insurance contracts could be considered 

QLTCI by law. If the LTC (standalone or riders) contracts meet the relevant 

requirements, their benefits are received income tax free. 

In 2006 the Pension Protection Act (PPA) became law. Certain provisions of it 

relate to long term care and became effective January 1, 2010. Most importantly, 

these provisions have enabled the sale of qualified long term care riders within 

annuities. Such annuities may be either immediate (i.e., paying regular income) 
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or deferred (effectively a tax-deferred accumulation account with provisions for 

annuitization.) A key consideration, however, is that the legislation enabled 

QLTCI to be sold only in non-tax qualified accounts. Annuities sold within Tax 

Sheltered Accounts (403(b)), 401(k)’s, and IRA’s, for example, are excluded from 

the provisions of the law relating to combination annuities. 

I believe that consideration should be given to enabling the use of combination 

annuities within such tax-qualified accounts. Why is this desirable? The 

discussion can be grouped into these categories: 

A. Demographic Considerations 

B. Experience with the Standalone Long Term Care Policy 

C. A Discussion of the Combination Annuity 

D. Specific Issues Relating to the RFI 

A. Demographic Considerations 

1. Americans are aging. It is well known that the first of the Baby Boomers 

are reaching what has been considered normal retirement ages (e.g., 65.) 

This population overall is huge. In 2010, there are approximately 55 

million Americans 55 and above, and that number will grow to 70 million 

by 2020. 

2. Americans are living longer. Life expectancy has moved up to 

approximately age 83 (for those aged 65.) Americans can thus expect to 

live longer during retirement. 

3. Americans incur significant long term care expense. The national 

average cost in a nursing home for a private room was $74,000 in 2009. 

Huge geographic variations exist, however. Perhaps the highest average 

state cost is Hawaii’s, where the cost is a staggering $152,000. It is 

known that Americans prefer to live in their own homes as long as 

possible. Costs, while high, there are more moderate, with a national 

average of $24,000 for an individual who receives 5 services 5 times a 

week. 

B. Experience with the Standalone Long Term Care Policy 

4. Standalone Long Term Care Insurance is very expensive. A 65 year 

old wishing to buy 4 years of coverage that would provide a range of 

benefits at levels sufficient to cover the national average for nursing home 

expense in 2009 would pay at least $2,500. (The policy benefits would 

not grow with inflation.) 
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5. Standalone Sales have plummeted in the last few years. Individual 

sales have fallen from a level of 750,000 policies in 2002 to about 200,000 

in 2009. The drop has been consistent over this time period, not sudden. 

6. Reasons for Sales Drop. 

a. As noted these policies are very expensive, and economic factors 

certainly do come into play. 

b. It is hard for Americans to make a choice to address issues that 

may not surface for ten or more years when they have other 

pressing needs. 

c. Furthermore the vast majority of these policies do not build any 

internal value (such as a return of premium provision) so should the 

insured die without having incurred any long term care expenses, 

he will not have received any benefits. (This is known as “Use it or 

lose it”, and is a commonly stated reason why individuals choose 

not to purchase this coverage.) 

d. The underwriting for this product is very difficult and very lengthy, 

and Americans feel the likelihood of acceptance by the insurer is 

not great. 

e. Over the past ten years especially, there have been a number of 

high profile very significant rate increases by insurers. 

C. A Discussion of the Combination Annuity 

 

7. Combination Annuity Design. A combination annuity as noted can be a 

deferred annuity and an LTC rider, or an immediate annuity with an LTC 

provision. All sales are currently of the single premium type.

8. Deferred Annuity with LTC Rider. This is the prevailing product 

currently being developed. The deferred annuity may have the very same 

features of annuities which do not include the LTC rider, or there may be 

some special annuity features. The point is that all the purposes for which 

an annuity is purchased continue to apply when a combination annuity is 

purchased. These include tax-free growth in the account, potentially some 

valuable investment guarantees, and potentially a death benefit guarantee 

of some sort. 

a. The LTC benefit provides additional value (beyond that of the 

annuity) when the insured becomes chronically ill. 

b. In most contracts developed to date, when insureds become 

chronically ill, such additional value is paid out after the 

annuity value is paid out. Although this may seem like a 

disadvantage, after all the insured is simply getting his value back 

first, the design addresses two extremely important objectives. The 

first is that it lowers costs, as the insurer’s exposure to loss is 
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deferred or lowered, much the same way as a deductible in auto 

insurance works. Secondly, the deferral of risk payment enables 

the insurer to offer the coverage using simplified underwriting 

techniques enabling a bigger portion of the population to 

qualify for coverage. 

c. The annual cost of such an annuity is much lower than the 

standalone. The coverage described in section 4 would cost 

approximately $700, compared to the standalone cost of $2,500. 

This makes the product affordable for more Americans. 

9. Immediate Annuity plus LTC. This kind of design is potentially of 

much greater interest in retirement plans. 

a. The sale of immediate annuities generally has some pockets of 

significant success, but overall sales are tepid. One major 

reason from a consumer point of view is the loss of an inheritance 

value (annuities offer options that provide some insurance 

proceeds upon “early death”.) A second reason is the lack of 

flexibility in such offerings. They do not adjust when an annuitant’s 

circumstances would call for changes.

b. LTC provisions. Combination immediate annuities are at an early 

stage of development. A typical design would increase the 

otherwise determined periodic payout (e.g., $1,000 monthly) to 

some higher amount (e.g., $4,000 monthly) should the insured 

become chronically ill. Coverage can stay at such level while the 

insured is chronically ill or may be subject to a limited benefit 

period. The issue is one of cost.

10. Who can buy a combination annuity? 

a. The target market for this business is perceived to be 55 to 70. In 

other words, we are talking about pre-retirees and retirees. 

b. To buy such an annuity an applicant must have some amount of 

assets that he is able to invest in a combination annuity. A 

considerable number of Americans would be able to buy such an 

annuity, but clearly many others would not have the requisite 

assets. 

D. Specific Issues Relating to the RFI 

11. Enabling defined contribution plans to purchase combination 

annuities would free up a major source of assets not currently 

available to prefund for one’s long term care costs. As noted, 

current law does not allow for combination annuities in qualified 

plans. The only way one can pay for LTC using qualified funds is if the 
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retiree takes a withdrawal from the qualified plan to fund LTC insurance. 

Taxes would have to be paid, and as noted the coverage is expensive. 

a. One could correctly point out that an applicant could take a 

withdrawal today to fund a (cheaper) combination annuity. I 

believe this is unlikely. There are simply too many steps. 

b. Freeing up such money within the qualified plan makes sense. 

After all, the purpose of the accumulated assets is to help the 

retiree address his living expenses during his retirement years. 

c. In the annuity marketplace approximately half of all funds held 

by insurers are funds held in qualified plans. Thus, the impact 

would be significant. 

12. Specific issues relating to immediate combination annuities. I believe 

that it would be feasible to develop a combination annuity for use within 

certain qualified plans that would not require underwriting. There may 

need to be some limiting conditions present to preclude the effects of antiselection, but employment relationships would do much to limit, although 

not necessarily eliminate, such anti-selection in the first place. 
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Exhibit A 

Cary Lakenbach, F.S.A., M.A.A.A. 

Cary Lakenbach is an actuary, consultant, writer, and speaker, and is a nationally 

and recognized expert on the subject of combination annuities, and combiantion 

products generally. 

Cary Lakenbach founded Actuarial Strategies in 1991. Actuarial Strategies has 

gained recognition for its creative product development capabilities as well as its 

solid core actuarial, financial, and marketing and distribution expertise. It is a 

leading firm in the area of combination products. 

Cary’s recent work has centered on such Integrated Annuity and Long Term 

Care offerings, a natural continuation of the work the firm has done on life and 

LTC combinations since HIPAA became effective in 1997. The services 

provided by the firm in this market segment are comprehensive and are both 

actuarial and non-actuarial, including (a) Market Research, (b) Feasibility 

Studies, (c) Contract Designs, (d) Pricing / Financial Analysis, (e) Development 

of Underwriting and Claims Operations (Directly or with Vendor), (f) Tax Analysis, 

and (g) Systems and Testing Support. 

Cary is a member of the Hartford Actuaries Club, a charter member of the 

Society of Actuaries Foundation, a member of NAVA, and has served on a 

number of industry group task forces. His education includes a BS degree from 

the City College of New York and an MA degree in Mathematics from Syracuse 

University. Cary writes for the National Underwriter and other publications and 

presents often at LIMRA, IRI-NAVA, and SOA conferences.