Does It Makes Sense to Buy Hybrid Long-Term Care Insurance?
For well-off people in particular, this alternative to traditional policies or the option of self-insuring could be an attractive possibility.
In my work, I’m increasingly discussing with Baby Boomers how to pay for any long-term health needs they may incur in the future. For some, purchasing a hybrid long-term care policy is often a good solution.
Many of my clients in their 60s and 70s have seen first-hand the costly nature of long-term care as they deal with the needs of their own aging parents. For people with limited assets, a diagnosis that requires long-term care may cause significant financial hardship. In their cases, a traditional long-term care insurance policy will help cover their costs.
In other cases, a person has a significant amount of money saved and invested. Some experts recommend these individuals or couples simply self-insure by using their own savings or investments instead of paying an insurance company to bear the risk.
However, that may no longer be the best strategy. That’s because the evolution of a “hybrid” long-term care plan extends the utility of these policies, even for those who are financially well off.
Here’s How a Hybrid Policy Works
Simply put, a hybrid long-term care policy combines the benefits of life insurance (or annuity) with long-term care benefits.
A person can buy a hybrid policy by paying a one-time lump sum premium or by paying over a number of years. If it turns out long-term care is not needed, the policy works much like a traditional life insurance policy, with a death benefit paid to a beneficiary when the insured person passes away.
If the insured person does need long-term care, the policy will pay benefits toward those expenses. Similar to a traditional long-term care policy, the benefits are paid in an amount chosen when the policy is purchased, and expressed as an amount per day, month or year.
But here’s where a hybrid policy really shines. If long-term care is never needed, the policy’s life insurance death benefit is often similar to the amount paid for the policy. On the other hand, if long-term care is needed, the amount of money available can exceed the death benefit, often several times over, offering tremendous leverage of premium dollars. For example, a client of mine recently received quotes for a policy with a death benefit of $144,000, but $432,000 is available for long-term care expenses.
This policy required a one-time premium of $110,000. Had the client taken her money and instead invested it herself for future long-term care needs, it would take her 28 years to achieve the same amount if she were able to achieve a return of 5% per year on her investments.
For financially well-off individuals who might otherwise consider self-insuring for long-term care, here are some of the attractive benefits offered by a hybrid long-term care policy:
- Lock in the Premium: Premiums can be locked in from the initial purchase date and don’t increase. Unfortunately, this has not been the case with traditional long-term care policies, causing financial strain for some people as premiums can increase significantly during the policy’s life.
- Substantial Return of Premium: The death benefit protects people who end up not needing long-term care. While data indicate there is a high likelihood long-term care will be needed, a policy owner can rest assured that money spent for long-term care insurance will not be wasted. In most cases, a policy’s death benefit will pay back most, if not all, of the premium dollars spent.
- Leverage: A person could set aside $150,000 in an investment account earmarked for future long-term care needs, or instead use that $150,000 to purchase a hybrid long-term care policy. If they spend $150,000 to purchase a hybrid policy, at the very least it will return these funds at death. But because the potential long-term care benefits paid out could significantly exceed $150,000, there is tremendous leverage available in placing that sum of money in the policy.
- Purchase with “Inefficient” Funds: Many hybrid long-term care plans still offer the ability to purchase a policy in one lump sum — a feature no longer available with traditional plans. This presents an attractive opportunity for people who may have permanent life insurance policies that are no longer a good fit in their financial plans. These legacy policies often have large cash values and subsequently large gains (the difference between the cash value and premiums paid) that would be subject to income taxes if the policy were simply surrendered, or canceled. By taking advantage of what is referred to as a 1035 exchange (named after section 1035 of the Internal Revenue Code), one can “roll over,” on a tax-free basis, the cash value of the old life insurance policy to the new hybrid policy. This gives anyone the ability to repurpose funds into a product that has significant potential value in the future. Moreover, this can be done in one lump sum, so the purchaser never has to worry about paying premiums again. In addition, taxes can be avoided on any gains from the sale of the life insurance policy, potentially saving tens of thousands of dollars in tax.
As with any insurance, there are considerations to be mindful of. Most importantly, the insurance company must have the long-term financial strength to remain in business for decades into the future and pay claims. Additionally, some people may not like the idea of giving up control of funds that were earmarked for long-term care by instead purchasing an insurance policy.
Hybrid long-term care policies have opened up new ways of thinking about the role of long-term care insurance in financial plans. Because of their unique characteristics and the financial planning opportunities presented, these products may deserve a look from those who may have written off traditional long-term care insurance.
About the Author
Wealth Adviser, Brightworth LLC
Bud Boland is a Wealth Adviser at Brightworth and has devoted his career to working with high net worth and high-income individuals and families. Bud works closely with clients to understand their needs and develop customized financial plans to help them reach their short- and long-term goals. Bud is a CERTIFIED FINANCIAL PLANNER™ practitioner and received his Bachelor of Science in Financial Management with an emphasis in Financial Services from Clemson University.