Traditional & Hybrid LTC Insurance

Traditional long term care insurance

With a traditional policy there are a number of choices in designing a policy that meets any given need and budget.

The primary choices include:

1. Choosing the initial benefit level. This is generally expressed as either a daily or monthly benefit.  Generally, it is more advantageous to elect a monthly benefit, if available.

2. Choosing the time period. Periods can range from as little as one year up to as much as 10 years.

1 & 2 together result in what’s known as your initial “pool of money” or “benefit pool”.

It’s important to keep in mind that the time period chosen assumes you will use the maximum monthly benefit each and every month.  In reality, you may use less (or more) than the maximum monthly benefit in any given month.  If so, that month’s remaining benefit remains in your “pool of money”…the end result is that your time period to exhaust your benefits will be extended.

3. Waiting (or elimination) period. This is the initial period of time (expressed in days) after you become eligible for benefits that you must wait before benefits begin.

4. Inflation protection rider. For most people this is a must-have rider as it will increase your initial maximum monthly benefit and pool of money by the percentage chosen.  Choices range from simple to compound (more popular) methods to even on that is based on the CPI. Some have periods that last for lifetime and some have a number of years option (i.e., 10,15, 20 yrs.) or age maximum where the benefit will remain level after a certain number of years or once a certain age is reached.  Available interest rates vary between policies.  Most have 3% and 5% options; one company allow you to choose from interest rates starting at 1% and go up to 5% (in .25% increments).

5. Shared care rider. This is a relatively recent innovation that should be seriously considered when apply jointly.  In general term, it provides that as long as both policies have identical provisions, if one Insured has exhausted his or her benefits they can access benefits from the second Insured’s policy (even if the second insured is on claim as well).

It’s important to note that the premiums on a traditional long term care insurance policy are not guaranteed to stay the same.  You might consider them as being similar (though not the same) as a health insurance premium.  If a long term care insurance company wants to raise premium rates, it has to do so through a process of getting approval from a particular state’s Dept. of Insurance (at a minimum…Partnership insurance policies may have additional approvals required).

Most traditional long term care insurance policies are “qualified” policies.  So long as the LTC policy meets certain criteria established by the federal government, the premiums for the policy are considered “medical care” and thus qualify for the medical expense itemized deduction.  Some states will also give a deduction or credit.

Hybrid (or asset-based or linked-benefit) long term care insurance

An alternative long term care insurance policy that has become popular these days is known as a “hybrid” policy.  It combines a very little life insurance (or uses an annuity) along with the major emphasis being on long term care benefits.

The primary differences between traditional and hybrid LTC life insurance policies are the following:

1. With the hybrid policy if you don’t end up ever using the policy for long term care expenses and you pass away, whoever you name as a beneficiary (ies) would receive the life insurance amount.  With a traditional policy, if you don’t end up using it (that may actually be a good thing), there’s no benefit when you pass away.

2. With a hybrid policy, the insurance company can never change (increase) the premiums you are paying…they are guaranteed.  With a traditional policy, the insurance companies can increase premiums in the future although it’s very difficult for them to do…they need to get approval from MN’s Dept of Ins.

3. With a hybrid policy you have what is referred to as “cash surrender values” within the policy that increase over time.  At some point in the future if you ever decided you didn’t want the policy anymore (I would not recommend, but could happen), you could “surrender” the policy and receive whatever cash values are in the policy at that point.  This feature applies only to what’s referred to as the “Base Policy”.  There are no “cash values” in a traditional policy, though some have limited or partial “return of premium” riders (very expensive in my opinion).

4. With a hybrid policy, you have some flexibility with how long you make premium payments; i.e., can pay for the policy in just one premium payment or by just paying premiums for a certain number of years and then you’re done.  With a traditional policy, you pay premiums on a continuous basis…no single or limited pay options.

Hybrid policies are not consider “qualified” polices so there is no potential tax deduction allowed.

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