For people who don’t want to spend thousands of dollars a year on long-term care insurance they may never use, there is another option.
Many insurance carriers offer hybrid long-term care insurance. This is a policy that combines long-term care insurance with life insurance.
There are two ways you can buy a combination life insurance and long-term care insurance policy.
The first is to buy a life insurance policy with a long-term care rider. This rider provides monthly payments if the insured becomes confined to a nursing home or other long-term care facility. Any funds used for long-term care are deducted from the life insurance death benefit. You must add the rider at the time of policy issue, however, you can drop the rider at any time and still continue the life insurance coverage.
The other option is a linked benefit hybrid policy. In this type of policy, the life insurance coverage and the long-term care coverage are linked (There are also linked benefit policies that link long-term care insurance with an annuity).
The policy provides a pot of money for long-term care that’s equal to several times your premium payments. For example, if your policy provides long-term care benefits that are five times the amount of premium, then $50,000 in premium buys $250,000 in long-term care benefits.
The pool of money created for long-term care can be used either for a specified minimum period of time or for a lifetime. If you never need long-term care benefits, the policy pays a death benefit to its beneficiaries upon your passing.
On some linked-benefit policies, if you use all of your long-term care benefits, the policy will guarantee a percentage of the death benefit, such as 10 percent.
In option one, the policyholder is likely buying a life insurance policy first and is tacking on a long-term care benefit. Option two is designed primarily to pay long-term care expenses, with life insurance as a secondary benefit. In the linked-benefit policy, the life insurance death benefit is limited to allow more of your premium to be applied toward long-term care benefits.
Another difference between the two is that the long-term care benefit is limited by the amount of the policy’s death benefit. Once you have withdrawn money for long-term care expenses equal to what your death benefit would be, the policy will no longer pay benefits on either type of coverage.
The linked-benefit option has an “extended” LTC benefit. This continues to provide long-term care coverage even after you use up the death benefit amount. This typically provides an additional two to five years of long-term care coverage beyond the two to three years that the hybrid policy's death benefit offers. There are a few policies available in which the long-term care benefit is unlimited.
Another benefit of the linked-benefit option is that if you cancel the policy, most insurers guarantee you will receive 50 percent to 100 percent of the premiums you paid or the policy’s cash value.
Similar to a traditional long-term care policy, hybrid policy benefits are paid in an amount and duration chosen when the policy is purchased.
Both types of hybrid policies are available at a number of carriers that offer both standalone LTC insurance and life insurance.
The advantages of a hybrid policy for long-term care include:
Whereas a standalone long-term care policy is subject to premium increases, a hybrid policy’s premiums remain fixed for as long as you own it.
No “wasted” premiums
One of the potential downfalls of traditional long-term care insurance is the possibility of paying premiums for two or three decades and never needing long-term care. This is less of a concern with hybrid insurance. If you never need long-term care insurance, your beneficiaries will receive a comparable death benefit upon your passing.
No waiting period
Many hybrid policies do not have a waiting period for long-term care benefits to be paid. Standalone long-term care insurance policies, on the other hand, may have as much as a 90-day waiting period, meaning you must pay the first 90 days of long-term care expenses out of your own pocket.
Hybrid policies enable you to pay the entire premium requirement in a single lump sum at the beginning of the contract. You can also pay premiums over a set time period, typically from five to 15 years.
Many hybrid long-term care insurance policies offer optional benefits. These include a return of premium rider and an inflation rider that increases the benefit amount at the rate of inflation. Some policies also ensure a small death benefit even if you use up the policy’s long-term care insurance benefits.
Easier to qualify for coverage
Experts say that underwriting for a hybrid policy is less stringent than it is for standalone long-term care insurance and life insurance.
The disadvantages of a hybrid long-term care policy include:
Much higher cost
Since you’re combining two types of coverage, you’ll be paying more for a linked-benefit hybrid policy than for a standalone life insurance policy.
What’s more, the period in which you have to pay all of your premiums is shorter than it is for a standalone policy. Standalone policy premiums are paid for as long as you own the contract. Hybrid policy premiums often must be paid within 10 years. This is similar to how your mortgage payment on a 30-year loan will be much less than what it is on a 10-year loan.
No tax deductibility
Whereas the premium payment for standalone long-term care insurance policies is tax deductible, that is not the case for hybrid policies.
Linked-benefit requires the purchase of permanent life insurance
An LTC rider expires when term life expires
If you opt for the long-term care insurance rider, you often can find them on term life policies, in addition to whole life and universal life. However, keep in mind that if the term expires on the life insurance coverage, you also lose the LTC insurance coverage.
Traditional long-term care insurance policies can be eligible to be part of a state Medicaid partnership program, which means you don’t have to spend all of your assets to qualify for Medicaid. Hybrid policies are not eligible for a partnership program.
You will likely pay more for a hybrid policy than you would for a standalone long-term care insurance policy.
The American Association of Long-Term Care Insurance (AALTCI) reported in 2020 the rates for two leading providers of linked-benefit hybrid policies. The following rates were for a $5,000 monthly long-term care benefit for three years:
- 55-year-old male: $3,625 to $5,010
- 55-year-old female: $3,400 to $4,550
To get a 3 percent annual benefit increase, the costs rose to:
- 55-year-old male: $5,278 to $6,710
- 55-year-old female: $5,500 to $7,010
AALTCI also reported that the average cost of a single-premium combination policy is $75,000.
If you're interested in a hybrid long-term care insurance policy, you should get quotes on several different policies, then compare those to the cost for standalone options on both long-term care and life insurance.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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