What is hybrid long term care insurance?

 

Long term care insurance couple

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 plans can be expensive, and 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.

In this guide, we will be looking at hybrid long term care insurance products and the characteristics that set them apart from traditional LTC products.

 

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.

The LTC benefits that are attached to the life insurance policy are sometimes referred to as 'living benefits' or a 'chronic illness rider.' 

To become eligible to receive long term care 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. Lincoln Moneyguard is the most popular product of this type.

Other hybrid products offer an annual or monthly payment schedule. In order to qualify, you must go through a life insurance underwriting process that may include a medical exam and/or medical history check.

 

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.

Seems simple, right? 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 are having a hard time making a profit on these products. There is no 'premium guarantee' on traditional LTC insurance contracts, so the company can increase your rate at any time.

This is incredibly unfair to the consumer, and there have been 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%. Once this happens, policyholders are forced to pay the higher rate, reduce their benefits, or cancel their policy.

Hybrid vs Traditional Long Term Care Insurance Infographic

 

Hybrid LTC Benefit Payout

This is what a typical hybrid policy might look like:

  1. You purchase a hybrid life insurance policy with LTC rider
  2. In year 15 of the policy you develop a qualifying chronic illness and become eligible to receive benefits
  3. Money is taken from the death benefit to pay for LTC expenses. Monthly and annual limits are defined in the policy.
  4. Once the death benefit is exhausted, additional benefits may be paid according to the amount specified in the policy.
  5. When you die, your beneficiaries receive a partial death benefit (usually a percentage of the original death benefit).

 

There are two slightly different models for paying out LTC benefits. These are:

  1. 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. You can use all of the death benefit for long term care expenses, but your beneficiaries will still receive a guaranteed minimum death benefit when you die, usually a percentage of the original death benefit. 
  2. 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 will 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. 

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 will receive home care from a family member or 'non-qualified' caregiver.

Conclusion

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:

  1. Guaranteed premiums
  2. 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 make sure that your future is secure. 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.

 

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Further reading:

Pros and Cons of Hybrid LTC Insurance

Hybrid LTC Insurance: 6 Questions You Should Consider

What is a 1035 Exchange?