Hybrid Long-Term Care Insurance: The Total Package?

Seeing as November is Long-Term Care Awareness month, it is only fitting to dive a little deeper into the benefits and intricacies of Hybrid Long-Term Care policies.  It is no secret anymore that Long-Term Care (LTC) presents a significant risk to your client’s financial well-being.  With average costs for LTC increasing year over year and average nursing and assisted living stays averaging 2.5 years (in some cases much longer), your client is left with the worse possible protection: blind luck.  It’s true today that more than half of adults age 65 will require LTC in their life meaning that the gamble on whether or not to protect against the enormous cost of care associated with aging is no longer in the client’s favor.  While traditional LTC policies still provide excellent protection and value towards covering LTC, their inflexibility is not to the taste of people who are unsure of what their future needs might be.  This is where Hybrid LTC policies shine.  While not necessarily for everybody, Hybrid LTC policies may be the total package for many. 

Why Wouldn’t Wealthy Clients Want to Self-Fund Their LTC?

For years, many people opted to either plan to self-fund the costs of long-term care or ignore the problem entirely.  Traditional LTC policies were expensive and the open market presented opportunities to accumulate funds for future tragedies.  With the current funds available for LTC in hybrid policies today, however, self-funding no longer stands out as a reasonable way to deal with the very real possibility of LTC in one’s future.  There are policies that offer nearly 4 times the total premium in LTC coverage.  Self-funding simply does not compete well with those metrics. 

For instance, if a person invested $110,000 dollars at a 5% return, it would take 28 years to reach the coverage of a hybrid LTC policy with an LTC payout of $432,000 dollars.  Self-funding can be risky and also requires a fair bit of research and work to plan it properly.  So with self-funding off the table, let’s dig into the differences between traditional LTC policies and hybrid LTC policies.

How Does a Hybrid LTC Policy Compare to Traditional LTC Coverage?

Hybrid LTC policies are relatively new to the life insurance landscape and were borne from the challenges and inflexibility presented by traditional LTC policies over the years.  To better understand this, let’s break down the key components of a traditional LTC policy.

• LTC policies cover expenses associated with care when a client is unable to perform at least 2 of the following daily living activities: Eating, bathing, dressing, continence, standing, walking, and sitting.
• LTC policies have the client set the coverage amount based on their budget when they purchase the policy.
• Premiums can be paid in manageable monthly installments but these premiums are not fixed and may increase significantly throughout the term of the policy with the rising cost of care.
• There is no ‘cash value’ associated with these policies and they work on a basic ‘use it or lose it’ principle.  If the insured never requires LTC, the premiums paid are not retrievable or transferable.

The first and second bullet points above and the costs associated with both a rising premium and a premium that they could not recoup eventually led to a steep decline in traditional LTC policy sales.  Essentially, consumers didn’t want to spend thousands of dollars on insurance policies that they might never use and end up with nothing to show for it.  

These traits of traditional LTC coverage led to the creation of Hybrid LTC policies.  Hybrid policies can take on several different formats depending on the client’s needs and budget.  The most obvious difference between traditional LTC coverage and Hybrid coverage is that the Hybrid coverage solves the ‘use it or lose it’ challenge by combining permanent life policies with LTC coverage.  Depending on how the hybrid policy is structured, a client can typically expect it to:

• Provide coverage associated with care when a client is unable to perform at least 2 of the following daily living activities: Eating, bathing, dressing, continence, standing, walking, and sitting.
• Provide for a death benefit to beneficiaries at the time of the client’s passing.
• Maintain ‘locked in’ premiums that will not increase throughout the duration of the policy.
• Make use of funds allocated to the death benefit to cover costs for LTC. (Additionally, LTC coverage in such policies is often many times greater than the death benefit)
• Premium payments are often made in one lump sum or through annual installments. (Although some carriers have more flexible premium schedules)
• The client can expect at least  the amount of premium paid back to the death benefit should the need for LTC never occur

As you can see, the hybrid model fills in some of the holes that exist in the traditional LTC policy.  While hybrid policies are not cheap, they do not suffer the rate increases that plague the traditional LTC policies and they at least protect the premium paid to the policy should the client have no need for extended care.  Paying in a lump sum may be attractive to clients with extra cash laying around and therefore are an excellent vehicle for wealthier clients.  It is possible that some carriers will also allow for 1035 exchange which makes it possible to roll over the cash value of an existing policy in order to purchase a hybrid policy.  

Whether the hybrid policy takes the form of life insurance with an LTC death benefit acceleration rider, a chronic illness rider, or an extension-of-benefits rider, the flexibility of funds combined with the stable premiums make it an excellent choice for many clients.  

Trust Financial Is Here To Help You Best Serve Your Clients as They Age

We are committed to keeping you up to date on the latest products and trends regarding long-term care solutions for your client’s insurance portfolio.  Your success is our fulfillment.  To learn more about which companies offer the most comprehensive hybrid policies, take advantage of our resource center, or contact one of our team members with your questions.