Hybrid Long Term Care Insurance plans combine traditional long term care insurance with life insurance. The hybrid long term care insurance plans will of course pay for long term care services for home health care, assisted living, adult day care and nursing home… just like the traditional LTC plans. However, if care is never needed and the person never uses their long-term-care coverage, then a death benefit, usually a bit more than premiums paid in, will then be given to the family in the form of a tax-free life insurance death benefit.
Hybrid long term care insurance plans have been around for about ten years, but it has just been the past two to three years when there has been any meaningful uptick in hybrid LTCI sales.
Frank Meyers who is the co-founder of a popular traditional Long Term Care insurance brokerage, says “In the past 24 months we have seen a 420% increase in buyers of hybrid long-term-care insurance vs traditional LTCI plans. Buyers are opting for hybrid long term care insurance plans in the place of traditional pay-as-you-go LTC insurance for the premium stability and tax free death benefit.”
Mr. Meyers has sold traditional long term care insurance in all 50 states since 1998 so he and his firm has his finger on the pulse of “what’s next”.
Hybrid Long Term Care plans have two huge advantage over traditional plans:
- Hybrid Long Term Care Insurance plans offer a guaranteed premium that can never be increased.
- Hybrid Long Term Care Plans will give the client their money back with interest at death if care is never needed.
These two facts have been the driving force behind the huge uptick in hybrid LTCI sales.
Currently, there are two long-term-care options: a traditional policy covering only long-term care, or a hybrid long term care insurance plan, which typically combines a long-term-care policy with a universal life-insurance policy or a fixed annuity.
CDC research shows that around 72% of individuals age 65 and older will need some form of long-term care before they die. Medicaid is available to help the poor who have no assets; Medicare doesn’t pay for continuing care in nursing homes. Nor does it cover assisted living or home health aides, who provide custodial care which is 95% of all long term care. Custodial care refers to assistance with things such as bathing, dressing, eating, transferring, toiling, etc.
Which is right for you?
Whether you need to buy a hybrid long term care insurance plan or a traditional long term care insurance policy will largely depend on what your net worth is.
As a rule of the thumb, people in their 50’s to mid 60’s will need to put in anywhere from $70,000 to $150,000 per person into a hybrid plan to have long term care insurance benefits similar to those of the traditional long term care insurance plans. Some companies will allow you to pay this over the course ten years while others require a single premium.
When deciding what type of product you should choose, you want to think about an economic 101 term called opportunity cost. Opportunity cost refers to what a person is giving up in a given situation as compared to the benefit they are choosing. In this case, the opportunity cost is the future interest earned on the chunk of money which is required to fund a hybrid long term care insurance plan. You have to weigh what kind of future interest you could bring in after taxes if you kept control of that lump sum vs the tax-free death benefit your family would receive if care is never needed. Premium stability as mentioned earlier, is a key advantage of hybrid long term care insurance plans, which are getting more popular with people planning for retirement.
Long term care insurance hybrids can also make sense for people with current annuities or life insurance cash value, because it is possible to transfer money tax-free from these policies to a hybrid through the IRS transfer rule called a 1035 exchange.
One other benefit of hybrid LTC plans is they are a bit more forgiving with respect to underwriting. They will take on cases where the client may have a few more health issues where a traditional long term care insurance company would decline them.