Hybrid Long Term Care
Hybrid insurance is an asset-based approach to fund long-term care. These products add a long-term care “rider” to a permanent life insurance policy (whole life or universal life products, not term life). The policy holder usually pays a large amount up front or a guaranteed set of premiums for a set time period. The long-term care feature allows you to receive a tax-free advance on your life insurance death benefit to pay for long-term care while you’re still alive. Hybrid insurance joins long-term care insurance with a universal life insurance or a fixed annuity. This form of insurance comes with many benefits that traditional long-term care insurance does not normally have. Policies with universal life insurance or a fixed annuity can be tapped into for other reasons besides long-term care and can even be passed on to heirs. With hybrid insurance, you can pay a single upfront premium, a set of premiums for a fixed term, or ongoing premiums. The reason this type of insurance is so attractive to people is because by paying one single premium or a set of premiums you avoid the risk of future premium increases. Some policies come with a “surrender period,” which means that you can not tap into that money until that period is up without paying a penalty. While the money is being held by the company, it will grow with interest and be invested. Each policy usually provides a fixed interest rate for cash value growth. This type of long-term care insurance is incredible because it could be looked at as a fixed-income investment, cover long-term care, and provide a life insurance benefit. If you change your mind a couple of years into the policy, you can most of your premiums back. There is also a death benefit that will be paid to your heirs when you pass. Leaving an inheritance is extremely important to a lot of people when it comes to choosing their policy. People really like knowing that the money they paid in their premiums will someday be passed down to their kids. Would a Hybrid LTC policy be a good fit for you? Hybrid policies usually have the most attraction to people in their late 40s to early 70s, who are concerned about their long-term care costs. The last thing you want to do is depend on your family to take care of you, but you would still like to leave them an inheritance when you die. According to Securian, 6.3 million people over the age of 65 are chronically ill, which will grow to over 15 million within the next 33 years. Traditional Long-term care insurance is going out of style due to the increase in prices and is now being replaced with hybrid policies. In 2000, Americans purchased 750,000 new stand-alone LTC policies compared to the 105,000 in 2015. On the other hand, in 2007, there were 15,000 new hybrid policies sold, compared to the 220,000 in 2015. What are the main advantages of a hybrid policy over a traditional long-term care plan? I find that some clients can’t get past the “use it or lose it” nature of traditional long-term care insurance. It is emotionally difficult to buy an insurance policy that may cost $4,000 to $8,000 per year and will pay out nothing if you pass away in your sleep. I had a client pass away last year in his mid-80s. He paid about $3,250 per year in premiums for 19 years. That is more than $60,000 that he and his family didn’t get to use for something else. That is the nature of insurance, however — you pay money to protect yourself from a risk that you hope never happens. If you pay for 20 years on a term life insurance policy and walk away with nothing, you don’t wish you had died during that period. Likewise, I never think that I wasted money on car insurance if I didn’t get in a car accident that year. For some reason, though, many people think differently about long-term care insurance. Hybrid policies reduce people's fear of wasting premiums by offering two exit strategies. The first exit strategy is that after the surrender charge period (usually 10 years), you can get most of your premiums back if you decide to cancel the policy. The illustration you receive from the insurance company shows that you will not make a return on your cash if you cancel it, but it is comforting to know that you can at least get a do-over if you change your mind down the road and want to cancel the policy. Secondly, there is a death benefit that is paid to your heirs when you die. Leaving an inheritance is really important to a lot of people. They like knowing that some of the money they paid in premiums to the hybrid policy will be given to their kids. The last major advantage is that the benefits are guaranteed. If you pay your premiums (usually for 10 years or less), you will have a contractually guaranteed death benefit, guaranteed cash value and a guaranteed amount of long-term care coverage. Traditional long-term care insurance policies, on the other hand, do not have these guarantees. In fact, insurers can petition the state departments of insurance to raise your premiums, sometimes as much as 50% per year. Some retirees with limited assets can’t afford these increases. What are the main disadvantages? Because hybrid policies do so many different things, they aren’t the best at any one thing. I recently ran an illustration where a client would pay $150,000 in premiums and after Year 10 could only walk away with $120,000 if she decided to cancel the policy. That is better than nothing, but walking away costs you $30,000 plus the opportunity costs on what you could have made investing that $150,000. The death benefit for most of the years of this policy was also only a little more than the $150,000 of premiums she would pay in. Because the insurance company is offering so much long-term care insurance, it can’t offer great growth on the cash value or a great death benefit. Another disadvantage of hybrid policies is that the premiums are paid over shorter periods of time than traditional long-term care, which can make them unaffordable for some people. While many factors can influence the price, hybrid care for a 62-year-old woman might be about $8,000 per year for 10 years, as opposed to roughly half that for a traditional LTC premium that is payable for life (or until care is needed). Conservative investors may like the idea of taking $100,000 that is currently in a CD and leveraging that money to provide some life insurance and some long-term care coverage. Lastly, the premiums you pay for hybrid policies are not potentially tax-deductible, because hybrid policies are not considered tax-qualified policies.