Long-Term Care Insurance

Hybrid Insurance Policies Gaining Steam

If you can't afford traditional long-term-care insurance, a new strategy that combines life insurance with long-term-care benefits may be more practical.

Consumers who are skeptical of traditional long-term-care insurance are snapping up “hybrid” policies combining life insurance with long-term-care benefits. But are these products really a better way to manage the risk of catastrophic long-term-care costs?

Even so, many consumers have found the hybrid pitch persuasive. More than 200,000 hybrid life insurance policies were sold in 2015, up 37% from 2014, according to LIMRA, a life insurance trade group.

They’re gaining ground as “traditional long-term care insurance is becoming less of an option,” says Wade Pfau, professor of retirement income at the American College. Premium increases on policies priced years ago have made headlines, and several insurers have dropped out of the market. The number of new traditional long-term-care policies sold in 2015 dropped about 20%, according to the American Association for Long-Term Care Insurance.

Here’s how one popular type of hybrid product works: Two long-term-care riders are attached to a universal life insurance policy. If you need long-term care, the first rider pays down the policy’s death benefit over the course of two years. If you exhaust the death benefit, the second rider extends your long-term-care benefits for another two to four years. There’s often an option to get some or all of your money back if you change your mind about the policy.

The up-front cost is hefty: You’ll pay at least $50,000 to $75,000 to get a meaningful long-term-care benefit. You face no risk of premium increases, but that’s not much of a threat with stand-alone long-term-care policies priced today either, according to the Society of Actuaries. A major reason for the big premium increases on traditional policies priced years ago is that insurers overestimated the number of people who would allow their policies to lapse. In pricing today’s policies, insurers have tweaked their assumptions to reflect low lapse rates and low interest rates, and they have more claims data to guide pricing decisions. The result: Policies priced in 2014 have just a 10% chance of needing future rate increases, compared with 40% for those priced in 2000, the Society of Actuaries found.

While the hybrid products ensure that you’ll get something out of the policy even if you never need long-term care, they also force you to forgo a market rate of return on a large chunk of your money. In a typical hybrid product purchased today, the cash value will grow at a very modest rate, such as 2%. That may sound reasonable in today’s low-rate environment, but if rates rise substantially, it won’t look so attractive.

Compare Your Options

When weighing hybrid products against traditional long-term-care insurance policies, consider how you might invest the money that’s not spent on premiums. If you would leave it in cash or other low-return holdings and don’t foresee any need for the money, that might be an argument for the hybrid product. If you would aim for a moderate return and might need the money to cover living expenses, stand-alone long-term-care insurance may make more sense.

Consider a 55-year-old man with $75,000 in liquid assets. He could spend it all on Lincoln Financial’s MoneyGuard II, a hybrid policy, and get initial monthly long-term-care benefits of $4,820. With 3% inflation protection, his monthly benefit would grow to $10,092 at age 80. If he never needs long-term care, his heirs would get a death benefit of at least $115,678.

If he instead opts for a traditional long-term-care policy with a $2,430 annual premium, he can get long-term-care benefits similar to the MoneyGuard policy: an initial monthly benefit of $4,500 and 3% inflation protection, according to the long-term-care association. He can also invest the $72,570 he has left over.

If he can get a 5% annual return, he’ll have more than $82,000 at age 80, even after paying the ongoing annual long-term-care premiums—and he has the flexibility to use that money however he likes.

Whether you’re buying a hybrid or a traditional policy, be sure to consider inflation protection—because you might make your first claim 30 years down the road. Consumers should also consider how much they value a hybrid policy’s life-insurance component, which adds an extra layer of cost. For many consumers buying hybrid products, life insurance is an afterthought. “People are generally buying this for the long-term-care coverage,” says Mike Hamilton, vice president of MoneyGuard product management at Lincoln.

If you do have a real need for life insurance, a hybrid product may not be the best solution, since a long-term-care claim will eat away at the death benefit.

“If you need both long-term-care and life-insurance protection, you ought to buy them both—not just take care of whichever one comes first,” says Jim Glickman, president of LifeCare Assurance, a Woodland Hills, Cal., long-term-care reinsurer.

Examine hybrid policies to be sure you’re actually getting long-term-care benefits. Many combo products package life insurance with “chronic illness acceleration riders,” which allow you to access your death benefit early if you have an illness that’s likely to last the rest of your life. Unlike true long-term-care coverage, these products won’t cover temporary conditions.

Ask your financial adviser to compare multiple long-term-care coverage options, says Jesse Slome, executive director of the long-term-care association. For hybrid products, he says, be sure to request and read the life insurance policy illustration, which outlines policy premiums, death benefits, cash values and other details.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Consumer Discretionary Stocks to Buy for 2022
stocks to buy

The 12 Best Consumer Discretionary Stocks to Buy for 2022

Consumer discretionary stocks may be among 2022's most challenging places to invest in. But these picks could overcome several sector headwinds.
January 4, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022

Recommended

12 Questions Retirees Often Get Wrong About Taxes in Retirement
retirement

12 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard to build your retirement nest egg. But do you know how to minimize taxes on your savings?
January 21, 2022
2021 Tax Returns: What's New on the 1040 Form This Year
tax filing

2021 Tax Returns: What's New on the 1040 Form This Year

Don't get caught off guard this tax season. Familiarize yourself with potential changes for your 2021 tax return before tackling your 1040.
January 21, 2022
How to Handle an Increase in Your Long-Term Care Premiums
long term care insurance

How to Handle an Increase in Your Long-Term Care Premiums

The cost of long-term care insurance keeps rising, and if your premiums are becoming unaffordable you should know that you have options. Here are five…
December 27, 2021
What Is the Best Way for a Widow to Use Life Insurance Proceeds?
life insurance

What Is the Best Way for a Widow to Use Life Insurance Proceeds?

There are many options, but the best use of the money is different for each widow and her unique circumstances.
December 17, 2021