Long Term Care: Traditional or Hybrid Policies?

June 4, 2019

Long Term Care Environment Shifting Towards Hybrid Plans

When reviewing our client’s insurance coverages, a question we’re often asked is whether to purchase long-term care coverage. To answer that question there are a lot of factors to consider from your family health history to your experience dealing with a loved one going through that difficult transition to your financial ability to cover the high costs of care. The other consideration is what type of policy you are looking to buy.

Traditional Policies

For a long time, the only option available was traditional long-term care. For those policies, you paid an annual premium and if you needed long-term care the policy would pay a specific dollar amount for a set number of years. Unfortunately, in most instances, those policies were drastically underpriced. Over the last 20 years, long-term care insurance providers experienced a perfect storm of historic low-interest rates, much higher than expected claims rates, and rising long-term care costs which forced many carriers to adjust prices on new and existing policies. The drastic premium increases and uncertainty of premiums in the future resulted in sales of traditional long-term care policies declining by over 90% in the last 15 years and new options coming to market…enter hybrid policies.

Hybrid Policies

An option that has gained popularity, and we have seen more clients consider are hybrid policies, which offer a long-term care benefit as well as life insurance death benefit to the beneficiary if the policy is never used.

Below are some key factors of hybrid policies that make them a possible solution for clients looking to purchase long-term care coverage:

No Use it or Lose it

  • The main benefit to a hybrid policy is if the policy is not used for long-term care needs, it still pays a death benefit to the beneficiaries of the policyholder. This is a nice hedge for clients who are concerned with investing large premiums and receiving no return on their investment.

Payment Flexibility

  • Hybrid plans have multiple payment options that can be specifically tailored to you depending on cash flow and coverage you need. You can pay annually, in one lump sum, or spread out premiums over 5, 7 or 10-year spans. Another benefit is premiums can be locked in from the initial purchase date and don’t increase.

Underwriting

  • Because there is a life insurance and long-term care component with these policies, medical underwriting is often less rigorous

Customization

  • Hybrid policies are flexible. You can structure them many different ways to get life insurance and long-term care coverage that fits your specific situation.

Use what you already have

  • Many of our clients have old life insurance policies that they purchased a long time ago. As they save, the life insurance benefit becomes less important. However, long-term care often becomes a bigger concern as they get closer or into retirement. If an old life policy has cash value, you can exchange that policy for one that provides a long-term care benefit with no tax consequences via a 1035 exchange.

While hybrid plans offer some attractive features versus the traditional long-term care coverage, they still may not be right for everyone. If you have specific questions on these types of coverage, reach out to your BDF team for guidance.

Sean Knoerzer is a Senior Advisor at BDF where he enjoys digging deep into the details of a client’s financial plan. He sits on the firm’s Financial Planning Committee, which is responsible for educating the BDF team on financial planning topics and improving the team’s planning process. He earned a Bachelor of Science in Agriculture and Consumer Economics with a concentration in Financial Planning at the University of Illinois.  Sean is a CERTIFIED FINANCIAL PLANNER™ professional.