Long Term Care Insurance—Is it time to consider a hybrid?

In Asset Allocation, Cash Flow and Budgeting, General Financial Planning, Insurance, Personal Financial Planning, Retirement Planning, Tax by Chip Hymiller

Normally, when someone mentions hybrids they are referring to fuel-efficient, money-saving cars.  Like hybrid cars, the intention of hybrid long term care insurance policies is to provide cost-saving insurance coverage by combining both life insurance (or an annuity) with long term care coverage.

Background of Hybrid Long Term Care Insurance

One component of the Pension Protection Act of 2006 (PPA) focused on overcoming the consumers’ reluctance to purchase long term care insurance coverage.  The primary reason consumers gave for not buying long term care insurance was that they felt premiums were wasted if they never required long term care.  The PPA made changes to the Internal Revenue Code (that became effective in 2009)  that would change the tax treatment of distributions from annuities and life insurance policies when used to fund LTC insurance coverage—thus the birth of hybrid long term care insurance policies.

What is a hybrid long term care insurance policy?

Basically, a hybrid long term care insurance policy combines either a cash value life insurance policy or a non-qualified deferred annuity with long term care insurance in one policy.  The cash value of a life insurance policy (or the value of an annuity) is used to pay long term care premiums in the hybrid policy.  At the point when long term care is needed, premiums stop and long term care benefits are paid.  These benefits are first paid from the remaining cash value in the policy (your money).  Normally, at the point when the cash value in the policy has been depleted, long term care expenses are paid through the policy (the insurance company).Hybrid Long Term Care Insurance

What are the benefits of a hybrid long term care insurance policy?

There are several benefits of hybrid policies worth mentioning:

1.  Premiums paid for using the cash value of life insurance or an annuity are not taxable.

2.  The cost of long term care insurance is generally lower than standard policies.  This is due to the fact that your money (the cash value of the life insurance or annuity) is being utilized to cover long term care expenses first.

3.  Long term care benefits received from the policy are not taxable.

4.  Should you die prior to needing long term care, you would get your money back.

5.  Underwriting guidelines for those in poor health are generally more favorable for hybrid long term care insurance policies relative to stand-alone policies.

What are the negatives associated with long term care hybrid policies?

As with any type of insurance product there are a number of negatives.  Here are a few to consider:

1.  There may be significant surrender costs and a long surrender period.

2.  It is likely that, in most cases, the vast majority of long term care expenses are paid with your money as the cash value in the policy is depleted first.

3.  The cash value in life and annuities will need to be quite large in order to provide enough coverage—especially for those requiring skilled nursing care.

While hybrid long term care insurance policies are relatively new, the hybrid policy—much like the car– may ultimately save money for the owner/insured.  However, we would suggest that each policy be evaluated individually and in the context of a comprehensive financial plan.