Understanding the Advantages of a Traditional Versus a Hybrid Life and Long-Term Care Insurance Policy
With a Traditional LTC Insurance policy, you pay each year until you receive care; at which point your premiums are waived. Just like a homeowners insurance policy, you may never have a claim and never receive anything back from the insurance company. With a Hybrid Life and LTC Insurance policy, you make a one-time payment or over a limited number of years. Hybrid policies provide long term care benefits if you need long term care, a death benefit if you die without needing LTC, or both if you need a limited amount of LTC. Due to their unique advantages, comparing the two types of policies is like comparing apples and oranges – as seen below.
Linked Benefit Life Insurance
A linked benefit insurance policy is a true hybrid policy that links a life insurance policy with a long-term care policy. Typically, the long-term care benefit amount is equal to about five times the premium you pay.
According to the American Association for Long-Term Care Insurance, 84% of long-term care protection purchased in 2019 was linked-benefit coverage. Just 16% was stand-alone long-term care insurance.
Buying a Long-Term Care Rider on a Life Insurance Policy
When you buy life insurance, you may have the option to add a long-term care rider (it can’t be added later). Generally, these long-term care benefits are not as robust as with a traditional long-term care policy or linked-benefit policy.
Both of these products will pay out through reimbursement of the actual cost of care or an indemnity model that pays a certain cash benefit regardless of the actual cost of care.
When you use the long-term care benefit, the death benefit is reduced. However, most of these policies still offer a death benefit of $15,000 to $20,000 if you use all of the coverage for long-term care.
Pros of Hybrid Life Insurance
In addition to paying a death benefit if long-term care isn’t needed, hybrid life insurance products have other features that can make them more attractive than traditional long-term care insurance.
Premiums are consistent
The premium is guaranteed on hybrid products and won’t increase over time. This appeals to consumers because premium increases (sometimes very high) were common with traditional long-term care insurance policies in the past. Now insurers are able to price long-term care policies more accurately, so rate increases are less likely, according to the National Association of Insurance Commissioners.
Money Can Go to Pay a Family Caregiver
A hybrid policy might allow you to pay a family member who provides care for you. If it uses an indemnity model that pays cash rather than reimbursement for the actual cost of care, you could use that cash to pay a family caregiver. This isn’t always an option with traditional long-term care policies, which pay claims by reimbursement only.
Builds Cash Value
Permanent life insurance policies build cash value, which you can tap to cover expenses other than long-term care. Stand-alone long-term care insurance policies don’t have cash value.
Cons of Hybrid Life Insurance
Not the Best Bang for Your Buck
If your top concern is long-term care, you’ll get more coverage for your money with a stand-alone long-term care policy. And it will be cheaper than a hybrid policy because you’re not paying for the life insurance benefit.
Longer Elimination (Waiting) Periods
The period you must wait before benefits kick in is typically 90 days with hybrid policies. Traditional LTC insurance policies can have elimination periods that range from 30 days to two years, he says. A longer period can lower the premium.
Long-Term Care Payouts Reduce the Death Benefit
Long-term care payouts can substantially reduce the death benefit of a hybrid policy. If you bought the policy because you have loved ones who will need the death benefit, that benefit won’t be there if you tap all the money for your care.
May Not Include Inflation Protection
Hybrid policies don’t always include an inflation protection option, Roers says. This option increases the cost of a policy, but it adjusts the value of the policy to increase with the rising cost of long-term care.
Fewer Tax Benefits
The tax benefits of hybrid policies might not be as generous. Both hybrid and traditional long-term care insurance payouts are tax-free. However, if you’re self-employed, you can deduct the cost of long-term care insurance premiums. With a hybrid policy, you can’t deduct the full premium—only the portion that goes toward long-term care coverage.
