Life Insurance, Annuities, Long-Term Care, and
Life Insurance, Annuities, Long-Term Care, and Disability Income Insurance Contracts USE, REGULATION, AND TAXATION AUGUST 2016
American Council of Life Insurers
TABLE OF CONTENTS Executive Summary............................................................... 3 Life Insurance Industry and Product Overview..................... 4 Life Insurance........................................................................ 9 Annuities.............................................................................. 15 Long-Term Care................................................................... 20 Disability Income................................................................. 23 Conclusion........................................................................... 26
2
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
LIFE INSURERS’
EXECUTIVE SUMMARY
PRODUCTS MEET
Life insurers’ products enable families to take responsibility for their financial security by meeting personal, retirement, and business needs during all stages of life
IMPORTANT PUBLIC POLICY GOALS BY HELPING AMERICANS ACHIEVE FINANCIAL AND RETIREMENT SECURITY
75 MILLION AMERICAN FAMILIES RELY ON
n Life insurance provides funds to meet family, retirement, medical,
and financial needs following the death of a loved one n Annuities protect against the risk of outliving one’s assets through guaranteed payments of income for the life of the insured (annuitant) n Long-term care insurance pays for the cost of care for individuals who require assistance due to chronic illness or cognitive impairment n Disability income insurance replaces earnings if an insured is unable to work due to accident or illness
AND THE NEED FOR
75 million American families currently count on life insurers’ products for peace of mind, long-term savings, and a guarantee of lifetime income during retirement. This need is increasing
OUR PRODUCTS IS
n Life insurers’ products advance public policy goals of helping
OUR PRODUCTS
INCREASING
safeguard Americans during times of financial stress and providing a private sector safety net for millions of Americans n We pool individual risks among many policyholders so that the cost of protection is affordable
Only insurance companies can insure these risks and provide safeguards and guarantees to protect families and businesses Current tax rules reflect and reinforce these public policy goals and should be preserved. Supporting these public policy goals is more important than ever in this time of unprecedented financial and retirement security challenges
American Council of Life Insurers
3
OUR BUSINESS IS ABOUT PROTECTING THE FINANCIAL FUTURES OF AMERICAN FAMILIES Our products serve public policy by providing guarantees that enable individuals to manage life’s financial risks Our products help individuals take personal responsibility for their financial security by protecting against the economic burden of n Death of a loved one or income earner (life insurance) n Outliving their assets (annuity) n Becoming dependent due to chronic physical or cognitive impairment (long-term care) n Being unable to work due to an accident or illness (disability income)
thereby decreasing their reliance on government programs
Life insurers assume these risks and pay benefits when they occur Only insurance companies can insure these risks and provide safeguards and guarantees to protect families and businesses
LIFE INSURERS’ PRODUCT COVERAGE FOR AMERICANS IN 2014 Americans have more than $20.1 trillion of life insurance coverage. 50% of all life insurance policyholders have children under 18 years old. 13% of Americans’ long-term savings is in annuities. 6.9 million Americans covered by long-term care policies. 70 million Americans covered by disability income insurance policies.
LIFE INSURERS’ BENEFIT PAYMENTS TO AMERICANS IN 2014 $68 billion to beneficiaries of life insurance policies. $71 billion in annuity payments. $9.5 billion in long-term care insurance benefits. $18 billion in disability income insurance benefits. Source: 2015 Life Insurers Fact Book
4
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
THE NEED FOR LIFE INSURERS’ PRODUCTS IS INCREASING Across America, managing life’s unpredictable events is made more difficult by inadequate savings and an aging population Only life insurers’ products can tip the balance
1
Nearly one-third of American children in households with one month or less worth of savings have no protection to weather a personal financial crisis, such as the death of a breadwinner.
2
More and more Americans are entering retirement with defined contribution plan and IRA nest eggs. They have the challenge of managing their assets to cover their needs in retirement while faced with the risk of outliving their savings.
3
The need for long-term care is skyrocketing. By 2050, the number of people 85 and older is projected to triple.*
4
During our working years, the probability of becoming disabled is greater than the probability of death.
Life Insurance
Annuities
Longterm Care
Disability Income
Source: ACLI calculations based on 2013 Survey of Consumer Finance data * Washington Post, February 9, 2016
American Council of Life Insurers
5
LIFE INSURERS PROVIDE FINANCIAL SECURITY IN MANY KEY MARKETS Life insurers offer policy options for each product that provide tailor-made solutions for all markets Personal insurance market—We offer policies that provide financial security during the lifetimes of individuals and families n Term and permanent life insurance n Long-term care insurance n Disability income insurance
Retirement market—We offer solutions to provide lifetime income during retirement through annuities Individual arrangements n Non-qualified annuities n IRAs
Employer-sponsored arrangements n 401(k), 403(b), and 457(b) plans n Pension plans
Business market—We offer solutions to address small business and corporate needs n Employee benefits: group life insurance, annuities, disability income,
and long-term care insurance n Life insurance: business continuation funding, succession planning
6
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
POLICIES ARE GENERALLY
WE KEEP OUR PROMISES BY PRICING OUR CONTRACTS TO ACCOUNT FOR INSURANCE AND INVESTMENT RISKS
UNDERWRITTEN
We assume and manage long-term risks
INDIVIDUAL INSURANCE
BASED ON THE
n Premiums and fees are set at issue n Investments are made over the life of the contract
MEDICAL, FINANCIAL,
n Benefits are paid upon future claims
AND LIFESTYLE
The underwriting process considers several factors to assess the insured’s risk profile and need
CHARACTERISTICS OF THE INSURED
n Medical—Family and personal health history; age; gender; weight n Lifestyle—Occupation; hobbies; alcohol/drug use; tobacco use n Financial—Insurable interest; coverage amount; insurance needs
GROUP POLICIES ARE UNDERWRITTEN BASED
Premiums and guarantees are determined using long-term assumptions about n Expected mortality or morbidity based on underwriting
ON THE GENERAL
n Investment return over the life of the contracts
CHARACTERISTICS OF
n Expenses
THE GROUP
n Regulatory and capital requirements
n Premium taxes and corporate income taxes n Risk management
Different risk factors vary in importance for different products We pool individual risks among many policyholders so that the cost of protection is affordable
American Council of Life Insurers
7
SUBSTANTIAL FINANCIAL AND CONSUMER PROTECTION REGULATIONS ARE IN PLACE TO ENSURE LIFE INSURERS MEET LONG-TERM PROMISES TO POLICYHOLDERS FINANCIAL REGULATION: COMPREHENSIVE AND STATE BASED
State Insurance Departments
a
a
Consumer Protection
Financial Regulation Statutory Accounting Principles
n
Risk-Based Capital Standards
n Suitability
Exams and Audits
Insurable Interest Rules
n
Nonforfeiture Rights Required Disclosure & Illustrations n Unfair Claims Practices n Complaint Assistance n
a
a Company Licensing
Product Regulation
Market Conduct
STATE REGULATION AND STANDARD-SETTING ORGANIZATIONS The National Association of Insurance Commissioners (NAIC), an organization of state insurance commissioners, which, in consultation with Society of Actuaries and American Academy of Actuaries, coordinates with state legislators, and federal and international regulators, to establish accounting principles and capital standards.
FEDERAL TAX RULES IMPOSE ADDITIONAL REQUIREMENTS ON LIFE INSURERS’ PRODUCTS Tax rules for life insurance contracts ensure that a contract’s primary purpose is to provide a death benefit. Multilayered requirements for annuity contracts encourage accumulation of retirement savings and use of benefits for retirement. Limitations imposed on long-term care preserve benefits for the care of the chronically ill. Rules for disability income insurance provide parity between different types of policies.
Additional federal rules apply Variable products, treated as securities, are subject to SEC and FINRA rules. Retirement products, like 401(k) plans and IRAs, are subject to comprehensive Department of Labor oversight. ERISA and HIPAA rules apply to disability income and long-term care insurance. Insurance groups that include savings and loan holding companies, or that have been designated as a systemically important financial institution (SIFI) are subject to Federal Reserve Board (Fed) oversight.
8
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
Life Insurance LIFE INSURANCE PROVIDES PEACE OF MIND, FINANCIAL SECURITY, AND DIGNITY AT A TIME OF SIGNIFICANT PERSONAL AND EMOTIONAL LOSS Life insurance provides a death benefit that can pay for n Income and retirement savings replacement n Mortgage, education, and other major financial obligations n Special needs and other dependent care funding n Final expenses n Other uses l
Business continuation funding Legacy and charitable giving l Estate planning/liquidity l
LIFE INSURANCE COVERAGE IN 2014 Total life insurance coverage in the United States was $20.1 trillion. There were approximately 278 million policies in force.
INDIVIDUAL AND GROUP LIFE INSURANCE PAYMENTS TO AMERICANS IN 2014 Individual life insurance protection in US totaled $11.8 trillion. Beneficiaries of these policies received $46 billion in death benefits. Group life insurance protection in US totaled $8.2 trillion. Beneficiaries of these policies received $21 billion in death benefits.
American Council of Life Insurers
9
Life Insurance BASIC AND OPTIONAL POLICY FEATURES OFFER ADDITIONAL BENEFITS TO MEET CRITICAL NEEDS Life insurance may also provide a source of funds during a lifetime that can pay for n Medical and other emergency expenses n College education n Retirement supplement n Loss of employment n Other significant life events
Spouse and Child Term Coverage Accelerated Death Benefit Critical Illness
Right to Purchase Additional Coverage
Waiver of Premium or Unemployment or Disability
Base Insurance Policy
No Lapse Guarantees
Accidental Death Coverage
Withdrawals and Policy Loans Long-Term Care Benefits
10 Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
Life Insurance LIFE INSURANCE COVERAGE IS AVAILABLE THROUGH BOTH TERM AND PERMANENT POLICIES
TERM AND PERMANENT GROUP LIFE INSURANCE
Term life insurance provides coverage for a specified period of time
ARE PROVIDED TYPICALLY TO EMPLOYEES
Provides the benefit when death occurs during the policy term
DURING THEIR TERM OF
n No cash surrender value
EMPLOYMENT, OR ARE
n Term insurance can often be converted to permanent life insurance
AVAILABLE THROUGH
Individual
AFFINITY GROUPS
n Typically purchased when coverage is needed for a specific period of
time (e.g., dependent children, term of mortgage)
Permanent life insurance provides lifetime coverage Provides protection for as long as the insured lives, supported by cash value accumulation n Individual l l
May cover one or two lives Whole life, universal life, fixed or variable u Premiums can be fixed or flexible u Cash values are based on mortality charges, expenses, and guaranteed or variable returns u Policies may pay policyholder dividends or additional amounts
Term and permanent life insurance differ in the level of premiums and duration of coverage Permanent life insurance lasts for the life of the insured
Illustrative, not based on actual company pricing Sample Relative Premiums for $500,000 Policy Purchased at Age 35
PREMIUMS
Term life provides coverage for a specific duration
le
Whole life, paid up at age 65
y
all
Whole life, paid up at age 90
u nn
w
ne
re
ab
,a
rm Te
Term life, 30-year level premium Term life, 20-year level premium
35
65
55
90
100
AGE
American Council of Life Insurers 11
Life Insurance A POLICY’S CASH VALUE SUPPORTS PERMANENT LIFE INSURANCE PROTECTION What does the cash value support? n The payment of increasing cost of protection as the insured ages n Level premiums n A variety of policy features during the life of the contract
Where does the cash value come from? n Periodic premium payments plus interest or investment earnings n Premiums that exceed the cost of protection, primarily paid in the
early years n Withdrawal of cash value generally results in a reduction of insurance
coverage
Cash value supports life-long coverage 1200
1000
800
Premium
DOLLARS
Cash Value
600
Defined Benefit Cumula
American Council of Life Insurers
TABLE OF CONTENTS Executive Summary............................................................... 3 Life Insurance Industry and Product Overview..................... 4 Life Insurance........................................................................ 9 Annuities.............................................................................. 15 Long-Term Care................................................................... 20 Disability Income................................................................. 23 Conclusion........................................................................... 26
2
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
LIFE INSURERS’
EXECUTIVE SUMMARY
PRODUCTS MEET
Life insurers’ products enable families to take responsibility for their financial security by meeting personal, retirement, and business needs during all stages of life
IMPORTANT PUBLIC POLICY GOALS BY HELPING AMERICANS ACHIEVE FINANCIAL AND RETIREMENT SECURITY
75 MILLION AMERICAN FAMILIES RELY ON
n Life insurance provides funds to meet family, retirement, medical,
and financial needs following the death of a loved one n Annuities protect against the risk of outliving one’s assets through guaranteed payments of income for the life of the insured (annuitant) n Long-term care insurance pays for the cost of care for individuals who require assistance due to chronic illness or cognitive impairment n Disability income insurance replaces earnings if an insured is unable to work due to accident or illness
AND THE NEED FOR
75 million American families currently count on life insurers’ products for peace of mind, long-term savings, and a guarantee of lifetime income during retirement. This need is increasing
OUR PRODUCTS IS
n Life insurers’ products advance public policy goals of helping
OUR PRODUCTS
INCREASING
safeguard Americans during times of financial stress and providing a private sector safety net for millions of Americans n We pool individual risks among many policyholders so that the cost of protection is affordable
Only insurance companies can insure these risks and provide safeguards and guarantees to protect families and businesses Current tax rules reflect and reinforce these public policy goals and should be preserved. Supporting these public policy goals is more important than ever in this time of unprecedented financial and retirement security challenges
American Council of Life Insurers
3
OUR BUSINESS IS ABOUT PROTECTING THE FINANCIAL FUTURES OF AMERICAN FAMILIES Our products serve public policy by providing guarantees that enable individuals to manage life’s financial risks Our products help individuals take personal responsibility for their financial security by protecting against the economic burden of n Death of a loved one or income earner (life insurance) n Outliving their assets (annuity) n Becoming dependent due to chronic physical or cognitive impairment (long-term care) n Being unable to work due to an accident or illness (disability income)
thereby decreasing their reliance on government programs
Life insurers assume these risks and pay benefits when they occur Only insurance companies can insure these risks and provide safeguards and guarantees to protect families and businesses
LIFE INSURERS’ PRODUCT COVERAGE FOR AMERICANS IN 2014 Americans have more than $20.1 trillion of life insurance coverage. 50% of all life insurance policyholders have children under 18 years old. 13% of Americans’ long-term savings is in annuities. 6.9 million Americans covered by long-term care policies. 70 million Americans covered by disability income insurance policies.
LIFE INSURERS’ BENEFIT PAYMENTS TO AMERICANS IN 2014 $68 billion to beneficiaries of life insurance policies. $71 billion in annuity payments. $9.5 billion in long-term care insurance benefits. $18 billion in disability income insurance benefits. Source: 2015 Life Insurers Fact Book
4
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
THE NEED FOR LIFE INSURERS’ PRODUCTS IS INCREASING Across America, managing life’s unpredictable events is made more difficult by inadequate savings and an aging population Only life insurers’ products can tip the balance
1
Nearly one-third of American children in households with one month or less worth of savings have no protection to weather a personal financial crisis, such as the death of a breadwinner.
2
More and more Americans are entering retirement with defined contribution plan and IRA nest eggs. They have the challenge of managing their assets to cover their needs in retirement while faced with the risk of outliving their savings.
3
The need for long-term care is skyrocketing. By 2050, the number of people 85 and older is projected to triple.*
4
During our working years, the probability of becoming disabled is greater than the probability of death.
Life Insurance
Annuities
Longterm Care
Disability Income
Source: ACLI calculations based on 2013 Survey of Consumer Finance data * Washington Post, February 9, 2016
American Council of Life Insurers
5
LIFE INSURERS PROVIDE FINANCIAL SECURITY IN MANY KEY MARKETS Life insurers offer policy options for each product that provide tailor-made solutions for all markets Personal insurance market—We offer policies that provide financial security during the lifetimes of individuals and families n Term and permanent life insurance n Long-term care insurance n Disability income insurance
Retirement market—We offer solutions to provide lifetime income during retirement through annuities Individual arrangements n Non-qualified annuities n IRAs
Employer-sponsored arrangements n 401(k), 403(b), and 457(b) plans n Pension plans
Business market—We offer solutions to address small business and corporate needs n Employee benefits: group life insurance, annuities, disability income,
and long-term care insurance n Life insurance: business continuation funding, succession planning
6
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
POLICIES ARE GENERALLY
WE KEEP OUR PROMISES BY PRICING OUR CONTRACTS TO ACCOUNT FOR INSURANCE AND INVESTMENT RISKS
UNDERWRITTEN
We assume and manage long-term risks
INDIVIDUAL INSURANCE
BASED ON THE
n Premiums and fees are set at issue n Investments are made over the life of the contract
MEDICAL, FINANCIAL,
n Benefits are paid upon future claims
AND LIFESTYLE
The underwriting process considers several factors to assess the insured’s risk profile and need
CHARACTERISTICS OF THE INSURED
n Medical—Family and personal health history; age; gender; weight n Lifestyle—Occupation; hobbies; alcohol/drug use; tobacco use n Financial—Insurable interest; coverage amount; insurance needs
GROUP POLICIES ARE UNDERWRITTEN BASED
Premiums and guarantees are determined using long-term assumptions about n Expected mortality or morbidity based on underwriting
ON THE GENERAL
n Investment return over the life of the contracts
CHARACTERISTICS OF
n Expenses
THE GROUP
n Regulatory and capital requirements
n Premium taxes and corporate income taxes n Risk management
Different risk factors vary in importance for different products We pool individual risks among many policyholders so that the cost of protection is affordable
American Council of Life Insurers
7
SUBSTANTIAL FINANCIAL AND CONSUMER PROTECTION REGULATIONS ARE IN PLACE TO ENSURE LIFE INSURERS MEET LONG-TERM PROMISES TO POLICYHOLDERS FINANCIAL REGULATION: COMPREHENSIVE AND STATE BASED
State Insurance Departments
a
a
Consumer Protection
Financial Regulation Statutory Accounting Principles
n
Risk-Based Capital Standards
n Suitability
Exams and Audits
Insurable Interest Rules
n
Nonforfeiture Rights Required Disclosure & Illustrations n Unfair Claims Practices n Complaint Assistance n
a
a Company Licensing
Product Regulation
Market Conduct
STATE REGULATION AND STANDARD-SETTING ORGANIZATIONS The National Association of Insurance Commissioners (NAIC), an organization of state insurance commissioners, which, in consultation with Society of Actuaries and American Academy of Actuaries, coordinates with state legislators, and federal and international regulators, to establish accounting principles and capital standards.
FEDERAL TAX RULES IMPOSE ADDITIONAL REQUIREMENTS ON LIFE INSURERS’ PRODUCTS Tax rules for life insurance contracts ensure that a contract’s primary purpose is to provide a death benefit. Multilayered requirements for annuity contracts encourage accumulation of retirement savings and use of benefits for retirement. Limitations imposed on long-term care preserve benefits for the care of the chronically ill. Rules for disability income insurance provide parity between different types of policies.
Additional federal rules apply Variable products, treated as securities, are subject to SEC and FINRA rules. Retirement products, like 401(k) plans and IRAs, are subject to comprehensive Department of Labor oversight. ERISA and HIPAA rules apply to disability income and long-term care insurance. Insurance groups that include savings and loan holding companies, or that have been designated as a systemically important financial institution (SIFI) are subject to Federal Reserve Board (Fed) oversight.
8
Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
Life Insurance LIFE INSURANCE PROVIDES PEACE OF MIND, FINANCIAL SECURITY, AND DIGNITY AT A TIME OF SIGNIFICANT PERSONAL AND EMOTIONAL LOSS Life insurance provides a death benefit that can pay for n Income and retirement savings replacement n Mortgage, education, and other major financial obligations n Special needs and other dependent care funding n Final expenses n Other uses l
Business continuation funding Legacy and charitable giving l Estate planning/liquidity l
LIFE INSURANCE COVERAGE IN 2014 Total life insurance coverage in the United States was $20.1 trillion. There were approximately 278 million policies in force.
INDIVIDUAL AND GROUP LIFE INSURANCE PAYMENTS TO AMERICANS IN 2014 Individual life insurance protection in US totaled $11.8 trillion. Beneficiaries of these policies received $46 billion in death benefits. Group life insurance protection in US totaled $8.2 trillion. Beneficiaries of these policies received $21 billion in death benefits.
American Council of Life Insurers
9
Life Insurance BASIC AND OPTIONAL POLICY FEATURES OFFER ADDITIONAL BENEFITS TO MEET CRITICAL NEEDS Life insurance may also provide a source of funds during a lifetime that can pay for n Medical and other emergency expenses n College education n Retirement supplement n Loss of employment n Other significant life events
Spouse and Child Term Coverage Accelerated Death Benefit Critical Illness
Right to Purchase Additional Coverage
Waiver of Premium or Unemployment or Disability
Base Insurance Policy
No Lapse Guarantees
Accidental Death Coverage
Withdrawals and Policy Loans Long-Term Care Benefits
10 Life Insurance, Annuities, Long-term Care, and Disability Income Insurance Contracts Use, Regulation, and Taxation
Life Insurance LIFE INSURANCE COVERAGE IS AVAILABLE THROUGH BOTH TERM AND PERMANENT POLICIES
TERM AND PERMANENT GROUP LIFE INSURANCE
Term life insurance provides coverage for a specified period of time
ARE PROVIDED TYPICALLY TO EMPLOYEES
Provides the benefit when death occurs during the policy term
DURING THEIR TERM OF
n No cash surrender value
EMPLOYMENT, OR ARE
n Term insurance can often be converted to permanent life insurance
AVAILABLE THROUGH
Individual
AFFINITY GROUPS
n Typically purchased when coverage is needed for a specific period of
time (e.g., dependent children, term of mortgage)
Permanent life insurance provides lifetime coverage Provides protection for as long as the insured lives, supported by cash value accumulation n Individual l l
May cover one or two lives Whole life, universal life, fixed or variable u Premiums can be fixed or flexible u Cash values are based on mortality charges, expenses, and guaranteed or variable returns u Policies may pay policyholder dividends or additional amounts
Term and permanent life insurance differ in the level of premiums and duration of coverage Permanent life insurance lasts for the life of the insured
Illustrative, not based on actual company pricing Sample Relative Premiums for $500,000 Policy Purchased at Age 35
PREMIUMS
Term life provides coverage for a specific duration
le
Whole life, paid up at age 65
y
all
Whole life, paid up at age 90
u nn
w
ne
re
ab
,a
rm Te
Term life, 30-year level premium Term life, 20-year level premium
35
65
55
90
100
AGE
American Council of Life Insurers 11
Life Insurance A POLICY’S CASH VALUE SUPPORTS PERMANENT LIFE INSURANCE PROTECTION What does the cash value support? n The payment of increasing cost of protection as the insured ages n Level premiums n A variety of policy features during the life of the contract
Where does the cash value come from? n Periodic premium payments plus interest or investment earnings n Premiums that exceed the cost of protection, primarily paid in the
early years n Withdrawal of cash value generally results in a reduction of insurance
coverage
Cash value supports life-long coverage 1200
1000
800
Premium
DOLLARS
Cash Value
600
Defined Benefit Cumula
