How hybrid long term care insurance policies work

As LTC insurance premiums increase and fewer insurance companies offer policies, options to stand-alone LTC policies are being created.  Hybrid policies that combine life insurance and LTC coverage have become the defacto replacement for use-it-or-lose-it traditional policies.

Hybrid life insurance policies are typically available to people who won’t qualify for a traditional LTC insurance mostly because of their poor health condition. If a hybrid policy holder ends up not fully utilizing his or her LTC benefits, then the unused money is paid to their beneficiaries in form of a death benefit. Two reasons why so many people have warmed up to hybrid policies is because they have fixed premiums, and offer a win-win approach.

How hybrid LTCi works

Usually, an LTC rider is added to a life insurance plan to form a single, permanent policy. The policyholder is required to pay premiums either one-off or in many fixed payments spread over a number of years. If the policyholder ever needs to use their LTC policy, then they can get a tax-free advance of their death benefit. This effectively means that the death benefit can pay for long term care if needed when the policyholder is still living. The insured receives the benefits when he/she is unable to do 2 of the 6 specified daily activities for themselves.  One a physician confirms that the insured is eligible, he/she can start accelerating the death benefit to pay for the LTC costs on monthly basis.

Case study

Example: a policyholder with a policy that amounts to $100,000 needs her death benefit accelerated to be able to finance her LTC costs. Typically, she will receive about 2% to 4% ($2000 – $4000) of their policy’s value on a monthly basis. This goes on until their benefit is completely utilized. In this case, it’d take 25 months ($4000 x 25) of long term care to exhaust all $100,000 worth in the policy.

But a majority of hybrid policies have a rider that allows the benefit to be extended, providing an assurance that the insurance firm will continue paying benefits each month even after the face value has been exhausted. The rider can cover you 1x or 2x the period of time it would have taken to receive benefits without it. For instance, in the example above where the insured is receiving $4000 through a period of 25 months, the extension rider allows them to receive the same amount for a total of 50 months.

Specifics vary by company

The specifics of the hybrid LTCi that you receive will vary from one company to the other. Some policies will cover all forms of long term care from in-home care to nursing homes and adult day care centers, while others won’t. In majority of cases though, the policy disburses a death benefit to the policyholder’s beneficiaries if they die without ever needing long term care. This would allow them to continue paying burden and relieve the financial loss that comes with losing a family member.

Hidden costs

Hybrid insurance buyers are trying to avoid heavy premium hikes that are now common with standalone LTC insurance policies. But it’s important to note that insurers are not responsible for the prevailing interest rates. When an insurer’s interest payment is less than the prevailing rates, the interest that’s lost could lead to a premium rise.

When determining what premiums to ask for, providers of hybrid products normally analyze the risk just like it’s done in traditional LTC insurance.  Depending on the specific firm, medical underwriting may or may not be involved.