The greatest retirement product never sold

In 2001, a prominent economist had a novel idea: Why not combine an annuity with long-term health insurance? The hybrid product could guard against two of the biggest risks to retirees: ballooning healthcare costs and the danger of outliving one's savings — and it would be cheaper than buying both products separately.

There was just one problem: No one would sell it.

"I did do a little bit of a road trip, presenting it to several insurance companies," said Dr. Mark Warshawsky, a senior fellow at the American Enterprise Institute and the inventor of the nonexistent product. "They never really tell you 'Yes' or 'No' or why or why not … I'm guessing that maybe the insurance companies' attention was elsewhere."

Twenty-two years later, Warshawsky still thinks the idea, which he calls the "Life Care Annuity," has enormous potential. 

Seven out of ten Americans who live to age 65 will eventually need long-term care — meaning nursing homes and assisted living — according to the Department of Health and Human Services. Ten thousand baby boomers have reached retirement age every day since 2010, the Census Bureau calculates. And demand for annuities — pension-like insurance products that provide a retirement income — has skyrocketed, with 2022 seeing the highest total annuity sales of any year on record.

Today, Warshawsky thinks more people than ever could use a Life Care Annuity.

"If anything, there's more of a need because there are more and more baby boomers retiring, and people are living longer," he said. "And you see the enormous need for long-term care, with Alzheimer's and other dementia — that is a really gigantic need that's just growing."

Warshawsky is not alone. Last month, the New York Times columnist Peter Coy wrote an entire article praising his proposal, titling it "The Perfect Retirement Investment Nobody Wants."

"I think his idea is ingenious, but it has never caught on," Coy wrote.

Some financial advisors are intrigued as well.

"I think it could potentially attract buyers who like to be cautious and covered, who I imagine are also better customers for the company," said Landon Tan, the founder of Query Capital in Brooklyn, New York.

The American Enterprise Institute

The thing people find so "ingenious" about the concept is its balance of risks. From an insurance company's point of view, an annuity only becomes expensive when the customer lives a long life. On the other hand, long-term care insurance only becomes expensive when the customer has severe medical needs — which typically means the person doesn't live very long. So to a large extent, the two risks cancel each other out. 

"If you combine the two, basically you balance the risks to the insurance company," Warshawsky said. "But you also balance the populations that are interested in both products, so you get a more even distribution of the population. And therefore you could offer this fine product to almost everybody."

What this means for consumers is a Life Care Annuity could be relatively cheap. In 2001, Warshawsky conducted a study with Brenda Spillman, a senior research associate at the Urban Institute, and Christopher Murtaugh, an associate director at the Center for Home Care Policy and Research. They found that the hybrid product would cost 3% to 5% less than buying both an annuity and long-term care insurance. Twelve years later, Warshawsky confirmed those findings in a separate study that was based on a different data set.

So why didn't it sell? During his 2001 "road trip," no insurance companies picked up Warshawsky's product. At the time, he was director of research at the TIAA-CREF Institute, the research arm of the insurer TIAA — but even TIAA didn't bite. The company did not immediately respond to Financial Planning's request for comment. 

Warshawsky still isn't sure why there was so little interest.

"I don't really know," he said. "I think there are two things that are true historically. Life annuities as an individual product are not a big seller …  And long-term care insurance, of course, has had a much more volatile history over the last 30 years."

There is truth to both points. The kind of annuity Warshawsky chose for his product is an immediate income annuity, also sometimes called a "life annuity" or "single premium immediate annuity" (SPIA). It is purchased with a single lump sum, starts paying out income either immediately or within a year, and keeps going until the buyer dies. 

This product is not a bestseller. Even in the annuity boom of 2022, sales of SPIAs totaled only $9.1 billion. Just to put that in perspective, sales of fixed-rate deferred annuities — a more popular product that defers payments until later, with a guaranteed minimum interest rate — reached $112.1 billion.

As for long-term care insurance, it's been a rough few decades. In 2002, about 754,000 people bought this kind of protection, according to a study by the Treasury Department. By 2018, that number had sunk to 57,000.

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From a business perspective, combining two unpopular products might not sound like a good idea. As Peter Coy put it, "If you don't like broccoli and you don't like brussels sprouts, you probably aren't going to like a broccoli and brussels sprouts salad."

And yet according to multiple analyses, the combination could be both cheaper and more accessible than the sum of its parts. It could address both the growing need for long-term care and the silver tsunami in which all American boomers will be age 65 or older come 2030. And at a time of exploding demand for annuities, "Life Care Annuity" could be a great name for a popular product.

So will Warshawsky go on another road trip, and try again to get insurers interested in his miracle cure for American retirement?

"I think I'm going to be a little more passive," he said. "I'll see if they come to me."