What is hybrid long term care insurance?
According to the US Administration on Aging, 70% of people turning 65 will need long term care services at some point in their lives.
Medical expenses for long term care can be devastating, so a good long term care insurance policy can go a long way in protecting yourself and your family against financial risk. It also gives you the peace of mind that comes from knowing that you will be able to receive high quality medical care if you develop a chronic illness in the future.
However, traditional long term care insurance is seen by many as a risky investment because the insurance companies often raise the premiums on existing policies to the point where policyholders can no longer afford to make payments and have no choice but to reduce their benefits or cancel their coverage.
These premium increases have caused people to look for alternative solutions, such as hybrid life insurance/long term care products. These hybrid policies, also known as 'linked benefit' policies, accounted for 84% of LTC insurance sales in 2018.
Defining Hybrid LTC Insurance
Simply put, hybrid long term care insurance is a life insurance or annuity product that includes long term care coverage in addition to its usual functions.
Depending on how the policy is structured, the LTC benefits attached to the life insurance policy may sometimes be referred to as 'chronic illness benefits.'
To become eligible to receive long term care benefits or chronic illness benefits from a hybrid policy, a doctor must verify that you are unable to perform at least 2 out of 6 activities of daily living (ADLs). These include bathing, toileting, transferring, eating, dressing and continence. Severe cognitive impairment is also covered.
Some hybrid products are single-premium life insurance policies, also known as 'asset-based long term care insurance.' These policies require a large single premium payment ($100,000, for example), and in return you receive a paid-up life insurance contract that includes LTC coverage.
Other hybrid products offer an annual or monthly payment schedule. Some products operate on a pass/fail underwriting basis, while others may require a medical exam and/or medical history check to determine the applicant's underwriting class.
Hybrid vs Traditional LTC Insurance
Under the traditional LTC insurance model, the policyholder pays an annual premium, and if they develop a chronic illness that requires long term care, the insurance company will pay LTC benefits for a duration and amount defined in the policy.
However, the reality is that many of these traditional LTC plans have seen drastic premium increases in recent years. This is because the insurance companies sold too many of these policies in the 1970s, 80s and 90s at rates that were based on inaccurate projections. Insurance companies have lost billions of dollars paying for LTC claims that exceeded their projections, and as a result, they choose to increase the premiums on existing policyholders. There is no 'premium guarantee' on traditional LTC insurance contracts, so the company can increase your rate at any time.
Sadly, this can be devastating to the policyholder, and there are countless examples of people paying premiums on traditional LTC insurance policies for 10+ years only to receive a letter in the mail stating that their annual premium is going to be increased by over 50%, sometimes even 100%. Once this happens, policyholders are forced to pay the higher rate, reduce their benefits, or cancel their coverage.
By contrast, hybrid policies include a premium guarantee. This is because they are life insurance contracts and are structured and priced differently than traditional LTC products.
Hybrid LTC Benefit Payout
In all hybrid policies, long term care benefits are taken from the death benefit total. For example, if your death benefit is $250,000, that number will decrease as you begin to take living benefits to pay for chronic illness expenses.
There are two slightly different models for paying out LTC benefits. These are:
- Accelerated death benefit only - In these policies, the LTC benefits are taken directly from the death benefit and do not exceed the total amount of the death benefit. Once the death benefit is exhausted, no more chronic illness benefits will be paid.
- Accelerated death benefit plus separate benefits - These policies are very similar, but they provide LTC benefits that go beyond the value of the death benefit after you use it up. In reality, though, these policies may have a lower total death benefit, which is something to keep in mind. Sometimes these policies provide better long term care coverage, sometimes they don’t. The rates will vary from person to person, which is why it's important to work with a knowledgeable agent who can compare the different options and provide the best possible quotes.
Every company is different in the features they emphasize, the way they structure their policies, and even the way they pay out long term care benefits once you become eligible to receive them.
For example, most hybrid policies offer a 'reimbursement payout.' This means that you must incur the medical expenses first, then apply for reimbursement and the company will pay the amount (up to the maximum monthly limit defined in the policy).
However, some hybrid policies offer an 'indemnity payout,' meaning that once you qualify to receive benefits (being unable to perform 2 of 6 activities of daily living), you can receive an annual lump sum payment directly from the insurance company without having to submit any receipts for specific expenses.
Compared to a reimbursement payout, the indemnity payout is a more consumer-friendly option that gives you more control of the LTC benefits. This is convenient for people who would like to have the freedom to receive home care from a family member or 'non-qualified' caregiver.
Some policies offer a guaranteed residual death benefit even if you exhaust all of the LTC benefits in the policy. This can be stated as a flat amount or a small percentage of the original death benefit, depending on the product. So even if you exhaust the entire death benefit paying for LTC expenses, there will still be a small death benefit paid to your beneficiary.
According to the LIMRA Insurance Barometer, 2/3 of Americans agree that most people need long term care insurance. However, the reality is that only 16% of Americans currently own long term care insurance.
This shows that people understand the importance of planning for long term care expenses, but they do not have confidence in the traditional long term care insurance model.
Hybrid long term care insurance can be a great alternative to traditional long term care insurance, depending on your age and health at the time of application.
There are two key advantages that hybrids have over traditional LTC policies:
- Guaranteed premiums
- Death benefit included in the policy
At Hybrid Policy Advisor, we will work with you to find the most competitive and highest quality hybrid policies to help you secure your financial future. We understand the important differences between all the different companies and policy types, and we strive to make it easy for you to acquire the best available product and make the right decision.
Call us at 1-866-365-6558 to speak with an agent today.