Asset Based / Hybrid LTC insurance policies

What are they and are they right for you?

What is an “asset-based” or “hybrid” LTC insurance policy and is it right for you? 

These policies offer long term care insurance benefits similar to traditional, or standalone, LTC insurance policies, but are a part of either a life insurance policy or an annuity. As such it’s difficult to make any direct comparison of a traditional long term care insurance (LTCi) policy with a hybrid LTCi policy. There some similarities as well as some notable differences.

Hybrid LTC insurance policies were created to address some of the perceived shortcomings of a traditional LTC insurance policy.

First, traditional LTCi policies rates (ie, premiums) are not guaranteed to ever change. While the policy is guaranteed to not be cancelable by the insurance company if you are paying your premiums, the insurance company can request a state insurance department to allow it to change premiums on an class of existing policies under certain circumstances (not always that easy to do, but possible). Think of a traditional LTCi policy as being similar to a health insurance policy in this regard.

In fact, policy owners of some LTCi policies that were sold years ago have experienced premium increases that were due to a number of factors; for example, an insurance company’s claims were more than the company expected or the company experienced poorer investment returns than expected, just to name a few possible reasons. While LTCi policies offered by insurance companies today have been priced with more claims experience and in a lower investment environment (so in theory if interest rates go up that should help mitigate a future premium increase,) again with traditional LTCi policies there are no guarantees that premiums might increase in the future.

Another perceived shortcoming of traditional LTCi policies is what happens if you die without ever needing to use the long-term care benefits of the policy. Traditional LTCi policies do not pay a death benefit to a named beneficiary (ies). Once again, think of traditional LTCi policies like a health insurance policy. If you don’t use it, that in reality is actually a good thing. However, are you willing to take the risk that you MAY incur significant medical costs and not have health insurance?  The same can be said of long term care costs.  And the odds are that you will have long term care costs at some point in the future.

A third perceived shortcoming relates to if you changed your of mind later on and decided you no longer wanted your traditional LTCi policy. With some traditional LTCi policies today, there are Return of Premium riders, generally at an extra cost (can be very limited in scope and expensive) that you can consider. Often time, the economics are such that you may be better off saving and investing the extra money needed to purchase one of these riders.

With hybrid LTCi policies each of these perceived shortcomings can be addressed to some degree.

First, we’ll look at hybrid LTCi policies where the long-term care benefit is contained either within a life insurance policy or an annuity policy. When you pay a hybrid LTCi premium, your policy premiums (whether single pay, limited pay, or continuous pay) are guaranteedthey cannot be increased in the future by the insurance company.

Secondly, it you owned a hybrid LTCi policy that was a part of a life insurance policy and you died before using your LTC benefits (or had used some, but not all of the LTC benefits), there would be a “death benefit” paid to your named beneficiary (ies). As with life insurance, this death benefit would be received by the beneficiary (ies) free from federal income taxes.

With a hybrid LTCi policy that is part of an annuity policy, whatever annuity proceeds were still within the policy when you died (not paid out as an LTC benefit) would be received by the beneficiary (ies). There could be income taxes payable by the beneficiaries in certain situations with a hybrid annuity/LTCi policy.

Finally, if you decide in the future to surrender your hybrid LTCi life insurance-based or annuity-based policy, there is typically a cash surrender value that the policy owner would receive depending on when the policy is surrendered. This cash surrender value may be a percentage of the premium paid in some policies or may be less or greater than the premiums paid depending on when the policy was surrendered.

While traditional LTCi policies are paid by continuing annual (or semi/quarterly/monthly) premiums, hybrid LTCi policies in most cases are paid by either a single payment or limited annual payments (generally payments can be between 1-10 years or over 20 years). One company has a hybrid product that allows for lifetime annual premiums or a combination of a single, limited payments or lifetime annual premiums.

In many cases, hybrid LTCi policies can offer a streamlined and faster underwriting process.  There may also be situations where someone who cannot qualify (or would be rated) for a traditional LTCi policy may want to consider a hybrid LTCi policy.

Which LTCi policy is right for you, traditional or hybrid? There is no RIGHT or WRONG answer. Each of these policies may have their strengths and weaknesses when applied to your own situation. Discuss your specific LTCi needs and your financial objectives with your LTCi Advisor.  Your advisor can then help discuss your various options so you can make an informed decision.

 

Only a qualified attorney or CPA can provide legal or tax advice and we recommend that everyone should consult with their advisory team as to any tax consequences when purchasing long term care insurance.

As an independent LTCi Advisor, my goal is to provide unbiased advice and help educate you on the various options available to you when planning for Long Term Care.
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Scott F. Coomes, J.D., CFP®, CLU®, ChFC®

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