Hybrid Long Term Care Insurance – An Upgrade on Traditional Benefits

In recent years, the Long Term Care (LTC) insurance market has evolved, and hybrid plans have emerged that combine life insurance with long term care benefits. Like traditional LTC plans, these cover a daily or monthly care expense, but offer three key features previously unavailable in LTC policies. Before diving into these hybrid options, here’s a brief overview of traditional long term care benefits – read Is Long Term Care Insurance Right for You? for more.

Traditional long term care insurance overview

Long term care (LTC) insurance was created to pay a portion of these expenses and protect your retirement nest egg later in life. Traditional LTC policies generally:

• Provide a daily or monthly benefit to cover home healthcare costs or the expense of care facility.
• Policies provide benefits for a predefined time, usually 1-5 years, though lifetime benefits are available for a significantly higher cost. 3-5 years is the most common benefit range.
• Require inability to perform two or more Activities of Daily Living (ADLs) – eating, bathing, continence, toileting, dressing, and transferring in and out of bed.
• Tax-qualified policy premiums are considered a deductible medical expense, subject to IRS limits.

Pros of traditional LTC policies

• They generally provide the highest pure long term care benefit per dollar of premium.
• Policies offer inflation protection to help benefits keep pace with rising costs.
• They are simple – a monthly premium for a fixed benefit if you need it.

Cons of traditional LTC policies

• Premiums increase occasionally, sometimes as much as 15-20% or more.
• “Use it or lose it” benefits like car or home insurance – if you have no long term care need, you receive nothing for your premiums.
• Qualifying can be difficult as age increase or with poor family health history.

Hybrid long term care insurance overview

Hybrid long term care protection is a feature added to a permanent life insurance policy. It provides many of the benefits of traditional policies without some of the common drawbacks.

Pros of hybrid LTC policies

• Like traditional policies, they provide a fixed benefit for long term care needs.
• Premiums usually stay fixed and payment schedule can be designed flexibly over almost any period – from equal monthly payments for life to a single lump sum – to guarantee future coverage.
• No “use it or lose it” – if LTC benefits aren’t used, the death benefit passes to family or the policy can be redeemed for the cash value.
• A minimum premium can guarantee a simple life / long term care benefit.
• Additional contributions can be made to build cash or life insurance benefit faster, adding significant versatility to its potential uses.
• Coverage can be easier to qualify for because underwriting focuses more on mortality risk.

Cons of hybrid LTC policies

• LTC benefits do not usually increase with inflation.
• Premiums are higher for the same level of LTC benefit because of the added life insurance and cash accumulation benefits.
• Hybrid strategies are more complex than traditional coverage because they can be used in a variety of ways and combine several benefits.

A hybrid vs. traditional LTC case study

Let’s look at a case study to compare options and see each strategy at work.

• Steve is 50 years old and generally healthy
• He hopes to retire by age 60
• He has saved $2 million in retirement accounts and another $1 million in other investments.
• He is looking for $5,000 per month in long term care protection.

Traditional long term care

• Steve can obtain $5,000 per month in coverage for 5 years
• Benefits increase 3% per year to keep pace with rising costs.
• Steve’s initial cost is $2,850 per year.
• By age 90, Steve will have spent $114,000 on premiums with no rate increases, more if rates increase.
• If Steve needs long term care, his max benefit is $300,000.
• If Steve does not need long term care, he receives no benefit.

Hybrid long term care – funded minimally to provide long term care and life insurance benefits

• Steve can obtain $250,000 in life insurance coverage with 2% of the benefit per month, or $5,000, available for long term care.
• Steve’s initial cost is $3,400 per year, but likely to stay fixed.
• By age 90, Steve:
  • has contributed $136,000 to the policy.
  • has a max benefit of $250,000 if he needs long term care.
  • has a life insurance benefit of $250,000 if he does not need long term care and wants to pass a benefit to family or charity.
  • has a projected cash value of $160,000 if he does not need long term care and prefers to use the cash for other purposes during his life.

Hybrid long term care – funded maximally to enhance cash growth and life insurance benefit.

• Steve plans to leave an inheritance to family and wants to consider how to maximize this policy for its insurance benefits.
• Steve can contribute up to $12,000 per year to the same policy until age 65 before pulling back to $4,000 per year, likely funded from his taxable investments.
• By age 90, Steve:
  • has contributed $280,000 to the policy.
  • still has access to $5,000 per month up to $250,000 for long term care.
  • has an enhanced life insurance benefit of $1.2 million if he does not need long term care and wants to pass a benefit to family or charity.
  • has an enhanced projected cash value of $1.1 million if he does not need long term care and prefers to use the cash for other purposes during his life.

The winner is…

In Steve’s case, a hybrid strategy looks like the way to go because of the added flexibility. He has multiple goals that can be addressed in this single strategy. He also has the resources to fund the policy and maximize the potential benefits both for long term care and his legacy goals.

It always depends on your circumstances, but in many cases, we find that hybrid strategies can pull double duty and be incorporated into a wider array of strategies, including tax and estate planning. The examples detailed here a hypothetical case and should be tailored to your situation. Your advising team can make the best specific recommendation, but these hybrid plans should certainly be included in the discussion.