The need for long-term care services is going to explode as baby boomers continue to age. The big question that this presents is how these services are going to be paid for? Medicare does not pay for them. At Cardinal, we believe there are 4 solutions to paying for long term care. In this 4 part series, we will explore all of them.
You can’t predict all the risks you will face throughout your lifetime, let alone when they will occur. For some situations that involve unknown risks, insurance policies can transfer the risk away from you and to an insurance company. For example, you buy homeowners insurance to protect yourself in case of a natural disaster, and you purchase auto insurance to help mitigate the risk you assume when you drive a car. You can prepare for your death or the passing of a loved one by purchasing life insurance and burial plots. Long term care insurance can provide additional financial protection for the unknowns inherent in retirement planning. Today there are better options for long-term care insurance than there were only 10 years ago, the most recent addition being hybrid long term care insurance.
What is hybrid long term care insurance?
The risk of needing some form of long term care for every individual is 0% or 100%; you are either going to need it or you’re not. For that reason, many people do not want to purchase long term care insurance out of fear that they will pay for something they may never use. The government realized this, and in 2006, the Pension Protection Act was signed. This act made it possible for life insurance and annuity companies to add long term care benefits to regular life and annuity policies, which is what hybrid policies are, a combination of life insurance and long term care insurance.
Hybrid long term care is the fastest-growing segment of the long term care business. Sharing some features of life insurance, hybrid long term care insurance is more consumer friendly and addresses several of the big problems of traditional long term care insurance. First, if you don’t use it during your lifetime, there is a death benefit that enables your beneficiaries to receive the unused portion when you die. Many of these policies also have a return-of-premium feature that allows you to get your premiums back (without interest) if you ever want to cancel your insurance. Second, the company can never raise the premium. Third, the money can be used for a variety of care settings, including in-home and rehabilitation care.
Hybrid policies are usually referred to as live, die, or quit policies. You either live, and the policy pays for long term care costs, you die, and the policy pays your beneficiaries a death benefit, or you quit, deciding you no longer want the policy, and you get back the initial premium. This is one of the most attractive parts of hybrid long term care insurance, you never have to feel as though you are “wasting” your money. Even if you do not use all the benefits for care, you heirs will receive what is left of the policy. All the money you put in will be paid out to you one way or another.
Not all hybrids are created equal. Because of the creative nature of the product, every company’s offerings can vary dramatically. Below, we are going to compare 2 products we offer our clients. We have 4 more policies illustrated in The Complete Cardinal Guide to Planning for and Living in Retirement Workbook, and we sell even more options.
This policy provides similar benefits to a traditional long term care policy. Since it is a single-premium life insurance policy, you pay the large premium up front, but it allows you to pay for most of it using IRA funds. Rolling over IRA funds is less desirable for benefit payouts but is very attractive to clients who have IRA funds they are not using for retirement income.
If you do not use all of the benefit during your lifetime, your heirs will receive a benefit after you pass away. It only costs 9% more to additionally cover a male spouse the same age on a survivorship policy. The first $75,000 of benefits does not have 3% inflation. The second $75,000 of benefits has the 3% inflation rider.
This policy works best for clients who have major health conditions that would disqualify them for the other policies that require underwriting. A large premium is paid into an annuity to purchase a deferred or future monthly income. The longer you wait to start the income, the larger the income you receive. The income is guaranteed to last for your entire lifetime. If and when you qualify for long-term care, the monthly income is doubled, and stays doubled as long as you need long-term care or for five years, whichever is shorter. The maximum benefit is equal to the cash value in the policy, meaning when you run out of money, you run out of benefits.
Can I qualify for hybrid long term care insurance?
Hybrid long term care policies vary greatly in the difficulty of health questions asked. The policy will start when you cannot perform 2 of the 6 “activities of daily living”, and if you can perform at least these 6 things currently, there is a policy you can qualify for.
For example, policy 1 above has full underwriting with extensive health questions. For an example of what full underwriting looks like, you can look at the underwriting for a traditional long term care policy. Policy 2 on the other hand only has one health question. It is “Do you currently need human assistance with bathing, dressing, transferring, toileting, eating, or continence?” In other words, they are asking of you can perform all of the activities of daily living.
How much does hybrid long term care insurance cost?
Hybrid long term care insurance policies can be hard to compare to other policies due to the fact that most of them require a lump sum of money instead of premiums over time. Some hybrids do offer annual premium options or 10-pay options (pay a premium amount over 10 years), but this is not the norm. Hybrid premiums are typically more stable over time due to this unique pay structure. There is also the return of premium option available with hybrids that other long term care insurance options do not offer. Due to all of this, the cost of combination products can be hefty, putting them out of reach for many consumers. In some cases, the benefit period in years may be shorter for some hybrid policies than for stand-alone long term care policies. And from a pricing perspective, these products in some cases can cost more than traditional long term care insurance because of the death-benefit component.
The prices for the 2 policies we discussed earlier are below. Keep in mind, policy 1 is a lot lower due to the fact that it asks extensive health questions, therefore many people cannot qualify for the policy. Policy 2 is higher because it only has the one health question. Both of these policy examples are run for women, as women are typically more expensive to insurance for long term care since they live longer.
If you decide to go the hybrid route, it is important to note that it should not be your sole life insurance policy. If you really need or want to leave a death benefit for your heirs, the long term care pay-outs from a hybrid policy could completely wipe out your death benefit during your lifetime. You should look into a true life insurance policy as well in this situation.
As you can see, hybrids have advantages and disadvantages. With all the options and price points, it is going to be important to really shop around. It will be best if you can find a broker who sells multiple hybrid policies and can compare the policies for you. Once you find a policy though, you can be rest assured that you will use the money that you put into the policy, one way or another.