Getting the Best of Both Worlds with Hybrid Long-Term Care Insurance


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No one likes to talk about getting sick or dying. These are taboo subjects, and it can be uncomfortable to picture yourself or your loved ones as anything other than happy, healthy, and here with us. If you struggle with confronting these topics, it can be even more difficult to sit down and make a plan to guard against the stress and potentially ruinous costs associated with a health care crisis. But the truth is, someone turning 65 today has about a 70% chance of needing some type of long-term car services before they die. If there was a 70% chance of rain today, would you grab an umbrella?

Hybrid Long-Term Care Insurance

If you know you could need long-term care but can’t stand paying for coverage on the chance you won’t use it, hybrid insurance might be a good fit.

LIVE – DIE – QUIT Insurance

Wow, what a set of options: live, die or quit? It may sound extreme, but this handy phrase is actually a useful way to illustrate that no matter what happens, hybrid long-term care insurance has you covered. Those three options cover every possible scenario in relation to you and your insurance.

  1. Live: you live for some number of years, at some point needing care that is covered by your policy. The policy pays the promised long-term care benefit, and you are taken care of.
  2. Die: you live for some number of years and die without ever using the long-term care coverage. The policy pays the promised death benefit to your beneficiaries tax-free.
  3. Quit: you have the policy for some number of years but decide at some point you don’t want it anymore. You can stop paying the premium and also get some of your money back.

Scenario 1 is what most people think of when they think about long-term care insurance. Traditional (non-hybrid) long-term care insurance also pays out in this case but will not provide a benefit in scenarios 2 or 3. Traditional insurance is more like auto or home insurance, where you pay an amount every month to the insurance company regardless of if you ever use the coverage. Hybrid insurance was created so that you never feel like you spent money to get nothing. If you need your policy for long-term care, you will get the most money out overall and you will also be very happy to have the coverage.

With hybrid insurance, scenario 2 will pay out as life insurance if you don’t need any care, but also if you use some of the care benefits without depleting all the available money. If, for example, you only need 6 months of care, but your policy covers 24 months, your beneficiaries will still see a substantial benefit paid out in the form of life insurance. This allows you to protect yourself and your heirs with the same money.

While we don’t recommend quitting a policy if it leaves you with no coverage, if you find yourself in a real money crunch or want to exchange your coverage, you aren’t stuck with a plan you can’t afford or don’t want. The amount of money you can expect to get back in scenario 3 will vary based on your specific policy, but it is very rare for anyone to choose this option. This type of insurance is purchased for a reason, and it performs very well.

What is Hybrid Long-Term Care Insurance?

The Pension Protection Act (PPA), passed in 2006 and first effective in 2010, intentionally incentivized individuals to purchase long-term care insurance. It would be very expensive for the government to pay for everyone’s long-term care costs, so they wanted to make it easier for us to take that responsibility on ourselves.

Before this law, if you pulled money out of a life insurance policy to pay for long-term care or long-term care insurance premiums, you would be taxed on the withdrawal. One of the things the PPA did was allow long-term care policies to include a tax-free death benefit if they were paired with a life insurance policy, thus creating hybrid long-term care. When you use long-term care coverage provided by a hybrid policy, you are accessing your death benefit early, while you are still alive.

Hybrid policies cost more per dollar of coverage than traditional long-term care policies, mainly because if a person buys traditional long-term care insurance and never uses it, their premiums subsidize the cost of care for every other policyholder who does need care. Another way to think of this is that hybrid policies cost more because you are guaranteed a benefit no matter what, whereas with traditional policies you are only guaranteed a benefit in certain situations.

Listen to learn more about this flexible way to cover your bases.

Although premiums are higher than traditional insurance, they are fixed and will not increase over the life of the policy. Traditional long-term care premiums are subject to occasional rate increases. Whether for a couple or for an individual, we commonly sell policies with an initial premium of $100,000. Because of the “Quit” option, this is really just a transfer of your money from one place to another; you don’t lose access to the money completely. The availability of riders like an Extension Rider can stretch these dollars out for years, even if both spouses need care.

Hybrid policies are also available pairing long-term care with an annuity instead of life insurance. They work similarly, but policies based on an annuity have easier qualifying health questions.

How it Feels

There are a lot of logical reasons to buy long-term care insurance in general and a hybrid policy in particular, but when you are dealing with thoughts of death and frailty, logic can go right out the window as fears seep in. We understand that most of the time it feels easier to avoid the topic or put it off to another time.

Not everyone has a strategy to deal with the financial risks of aging, but everyone has a plan. If you don’t know what your strategy is, then it’s clear you are planning to self-insure your risk as it comes up. We always ask our clients to answer these questions: “Is it possible that you will live longer than you expect?” and “Is it possible you will need care?” You should realize that the only answer to those questions is “Yes, it’s possible!” If you are not ready to answer yes to those two questions, you aren’t ready to talk about this yet, but we hope you’ll be ready soon.

Recently we learned one of our clients, Linda, had $100,000 in a bank account that she had set aside as a gift for her daughter Sarah. Linda wanted Sarah to have the money, but she couldn’t gift it yet because she knew that she might need that money for herself for care later on. With the purchase of a hybrid policy, Linda now knows that Sarah will get that money tax-free if she doesn’t use it for care. And if Linda does need it for care, she has more coverage than when the money was in cash. Sarah will be glad that her mother took care of it instead of making it her problem, a gift of its own.

If you are ready to talk big questions and turn your plan into a strategy, Cardinal is here to help. Contact us to learn more about the specifics of how these policies work or to ask for an illustration of costs. We are happy to include your children or other family members in the discussion to make sure that everyone is on the same page.

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