Imagine enjoying the retired life when the need for long-term care suddenly becomes a reality. The question hits hard: How will you pay for it without draining your hard-earned savings or relying on family? This is where hybrid long-term care (LTC) life insurance is a possible solution, offering coverage for your potential care costs if you need it and ensuring your loved ones still benefit if you don’t.
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What is hybrid life insurance with long-term care?
Hybrid LTC insurance is a combination of life and long-term care insurance plans. The LTC aspect of the coverage provides cash benefits if you need long-term care. The insurance aspect offers a death benefit to the policy’s beneficiaries. If you don’t use your LTC benefit, your beneficiaries receive the full death benefit when you pass. If you use the LTC benefit, your beneficiaries receive a death benefit that’s reduced by how much your LTC coverage paid for your long-term care expenses.
You can tap into your policy’s benefit to pay for medical and non-medical costs such as in-home care, assisted living or a nursing home.
Mark Baron, an LTC specialist at Baron Long Term Care Insurance, said hybrid LTC plans have become more popular over the years as traditional LTC plans have become more expensive.
“With the rate-increase problems with traditional long-term care insurance plans, hybrid plans took off,” Baron said. “Unlike the higher cost of today’s LTC [insurance] traditional-type plans that have no value if they are never used, hybrid plans have death benefits. So, you don’t lose the money if you don’t use the insurance.”
Types of hybrid life insurance
Tom Rieske, managing director at LTCI Partners, noted there are two main options for LTC hybrid life insurance:
Linked-benefit policies
These policies join life insurance and long-term care insurance into one policy. Their long-term care benefit is typically higher than their death benefit, and the LTC benefit increases over time to keep up with inflation. For instance, a linked-benefit policy could start with a death benefit of $100,000 but and a long-term care benefit of $300,000, then grow to as much as $800,000 by the time you need care, Rieske said.
Typically, these plans may be named by how long or how many payments it takes to pay off the policy. For example, a 15-year-pay policy has a 15-year repayment plan, while a 10-pay policy has 10 scheduled payments.
“An easy way to think about Linked Life/LTC plans is that they work very similarly to traditional LTC Insurance — except they have a life insurance benefit as well,” Rieske said.
Additionally, he noted that linked-benefit policies typically are permanent policies such as whole or universal.
Who it’s best for:
You’re looking for a life insurance policy with LTC coverage primarily for the LTC aspect and want level premiums with guaranteed benefits, Rieske said.
Life insurance with long-term care riders
Some permanent life insurance policies allow you to add a living benefits rider, such as a long-term care or chronic illness rider. This means you could use some of your death benefits while alive to pay for care instead of leaving it all to your heirs. For example, you may have a $1 million policy that allows you to use 1% each month ($10,000) to pay for long-term care, Rieske noted. Keep in mind, though, that whatever you withdraw from your policy to pay for long-term care will reduce your benefit dollar for dollar.
What it’s best for:
You’re looking for a hybrid policy and plan to use it mainly for life insurance, Rieske said.
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How much is hybrid life insurance with long-term care?
To give you an idea, Brian Gordon, president of Gordon Associates, shared an example in an email with CNN Underscored Money.
Baron said that a 60-year-old male might pay about $92,000 for $6,000 a month in LTC benefits for six years, while a female of the same age might pay around $107,000. You can pay in one lump sum or spread out those costs as an annual payment for typically 10 or 15 years. Some companies may allow a longer repayment period, too.
The price of a policy depends on factors like your age, health (including preexisting conditions), gender and how much coverage you want, said Eleanor Johnson, founding principal and managing director at Highland Capital Brokerage. Policy features also affect pricing, as changes to any of the following plan features can move your costs up or down:
- Monthly amount: How much you’ll receive monthly for your LTC expenses
- Inflation rider: Allows you to receive a separate monthly benefit to protect against rising costs of LTC services.
- Benefit period: How long you’ll receive payouts to cover LTC costs, such as three or six years
- Elimination period: Time you will cover costs of your LTC services out of pocket, usually 30, 60 or 90 days before your policy kicks in
While your health plays a role in your price, Baron stated that many plans have only one rate, regardless of your health condition, as long as your health condition is on the insurer’s approved list of ailments an applicant can have.
Women are another group with higher premiums because they tend to live longer and require more care.
That being said, there are certain factors that can lower your hybrid LTC insurance cost. Being married or having a partner can provide discounts because couples are likely to care for each other, Johnson said.
Hybrid LTC costs vs traditional LTC costs
Generally, hybrid policies cost more upfront than stand-alone LTC insurance, but the fixed premiums make it easier to plan long-term, our experts noted.
Tax implications for receiving long-term care benefits from a hybrid policy
Generally, long-term care benefits from hybrid policies are tax-free as long as the daily benefit is less than $410 per day, said Rieske. You can also deduct premiums as a business expense (up to a limit) if there’s a separate long-term care premium. If you have a health savings account (HSA), you may be able to use HSA funds to pay LTC premiums.
Is combined life insurance for long-term care worth it?
Hybrid life insurance can be worth it if you want to guarantee your long-term care needs won’t financially burden loved ones — and you can afford the premium. It’s a good option if you know you wouldn’t otherwise have enough savings or other means to cover your LTC expenses, too.
If you’re deciding between a hybrid policy and a stand-alone long-term care policy, a hybrid policy may provide the best return on investment because you don’t lose money if you don’t need the care.
Medicare and LTC
Medicare doesn’t cover any non-medical long-term care needs, which includes care given at home, in an assisted living facility or at a nursing home. However, you can use Medicaid to pay for nursing homes if your income is limited and you meet other requirements. Some people qualify for both Medicare and Medicaid.
Pros and cons of hybrid life insurance
Pros | Cons |
---|---|
Guaranteed premiums for linked-benefit plans | Higher upfront costs |
Dual benefit | Reduced death benefit |
Flexibility | Less customization |
Tax advantage |
Pros explained:
- Guaranteed premiums for linked-benefit plans: Unlike traditional LTC insurance, there are no surprise premium hikes with hybrid policies — you always pay the same amount with linked-benefit plans. Life insurance with LTC riders may have fixed premiums, too.
- Dual benefit: You get long-term care benefits if needed, or your heirs get a death benefit if not.
- Flexibility: Hybrid life insurance plans with a cash benefit provide cash payouts you can use as you wish.
- Tax advantage: Long-term care payouts are typically tax-free.
Cons explained:
- Higher upfront costs: Hybrid policies tend to cost more upfront than traditional LTC insurance.
- Reduced death benefit: If you have a policy with an LTC rider and use the rider for long-term care, what you withdraw reduces your policy’s death benefit dollar for dollar, Johnson said.
- Less customization: Hybrid policies might offer fewer options for long-term care coverage than stand-alone LTC insurance, especially since stand-alone policies focus exclusively on long-term care without needing to balance life insurance benefits.
Other ways to use life insurance to pay for long-term care
Suppose you have a traditional life insurance policy with cash value. In that case, you can borrow against it or exchange it for a hybrid policy through a 1035 exchange — this allows you to do so without paying taxes on your policy’s gains, Johnson said.
She also mentioned that you might be able to sell your policy through a broker but warned that this could have tax consequences. The proceeds you get from the sale could also disqualify you from getting Medicaid or other financial assistance programs.
Frequently asked questions (FAQs)
Yes, if your life insurance policy has enough cash value built up, you can use the money to fund a hybrid policy without paying taxes on the transfer. This is allowed through the IRS’s 1035 tax exchange provision. However, you may not need to do this if your current policy allows you to add a long-term care or chronic illness rider.
Hybrid life insurance can be a great estate planning tool because if you don’t use the long-term care benefits, the death benefit will go to your heirs. Beneficiaries generally don’t need to pay taxes on the money. Having a hybrid policy also helps protect savings that would otherwise go to your heirs from being drained by LTC expenses.
If you never need long-term care, the policy simply functions as life insurance. Your beneficiaries will receive your policy’s death benefit, although hybrid policies typically have a much smaller death benefit than a typical life insurance policy.
Yes. Baron noted that most hybrid life insurance policies allow for flexibility in how you use the money. Uses include home health care services and, in some cases, cash benefits you can use to pay for home care without submitting receipts.