By: Joey Casolaro, Analyst
With the recent popularity of long-term care insurance, it is not surprising that the demand for hybrid long-term care (LTC) policies are rising. The American Association for Long-Term Care Insurance (AALTCI) reported that in 2019 the industry sold 250,000 hybrid LTC policies.
This figure represents more than five times the amount of stand-alone long-term care policies sold in the same period.
Why Has Hybrid Long-Term Care Insurance Grown in Popularity
So why are hybrid LTC policies dominating the market? As I explained in my recent article “Is Long Term Care Insurance Worth It?”, the cost for traditional LTC policies has become prohibitive, with current policyholders seeing a 40-60% increase in their premium costs. In another study done by AALTCI, they found the average annual LTC premium for a healthy couple in their mid 50’s to be over $3,000.
Benefits of Hybrid LTC Policies
Hybrid long-term care plans provide a combination of life insurance with long-term care insurance into a single policy. These policies allow the owner to pay the premium upfront in a lump sum or over a 5-to-10-year time frame.
The significant advantages of these policies include the following:
1. Premium rates are fixed
Unlike with traditional LTC policies, the insurance company is not allowed to increase premiums in the future.
2. Guarantee return of premium
The premium you pay for these policies is guaranteed to be returned either in the form of long-term care benefits or a death benefit. The return of premium is a significant advantage compared to traditional LTC policies since it overcomes the “use it or lose it” approach that traditional LTC possesses. If the insured never needs the LTC benefit in the hybrid policy, they still have the death benefit in force.
Additionally, suppose the policy owner decides after paying the premiums that they no longer want the policy. Some riders allow an 80-100% return of premiums paid (subject to a vesting schedule).
3. 1035 Exchange
A popular way people have funded hybrid long-term care insurance is through a 1035 exchange.
A 1035 exchange is a provision in the Internal Revenue Service (IRS) code that allows for a tax-free transfer of an existing insurance policy to another like-kind policy.
Due to hybrid LTC policies containing life insurance, the IRS permits exchanges from a current life insurance or annuity policy to a long-term care hybrid policy.
This exchange allows any internal buildup of gains in an existing policy to be deferred. It is important to note that some specific rules and requirements must be met for a 1035 exchange of cash value to work.
If you are interested in performing a 1035 exchange with your existing policy, please reach out to your advisor to see if your policy qualifies.
Reimbursement Benefit Model vs. Cash Model
Lincoln National Corporation was the first insurance company to offer a hybrid LTC product. Today, many different insurance companies offer their type of hybrid policies. When searching for hybrid policies, it is essential to understand the difference between the reimbursement benefit model verse the cash model.
The policyholder must show evidence in the reimbursement model and receive approval of expenses before receiving the monthly benefit payment.
In the cash model, once the insured qualifies, benefits are paid without the policyholder submitting receipts of expenditures. The simplified monthly administration makes the cash benefit model much more desired as it allows for more flexibility, although the costs will be higher.
Consider These 4 Questions When Looking at Hybrid LTC Policies:
(1) How much coverage am I going to get?
(2) How long does the coverage last?
(3) What is the death benefit?
(4) What is the benefit pay-out model?
Any financial life planning question should be considered a part of a complete financial plan. Many people have the net wealth to self-insure a long-term care event. For others, insuring a part of the risk may be the most prudent approach.
The best time to purchase these policies is when you are in good health, in the 45-65 age range, and have the cash flow to afford the premium payments, whether through the lumpsum option or monthly option.
Your HIGHLAND advisor can discuss this with you. HIGHLAND does not sell insurance, but we can help you make the right decision for your insurance needs.
Joey Casolaro is a CERTIFIED FINANCIAL PLANNER™ at HIGHLAND Financial Advisors, a Fee-Only fiduciary wealth advisory firm that offers comprehensive financial planning, retirement planning, and investment management. Joey graduated from the University of South Florida with a bachelor’s degree in personal finance and successfully passed the CFP national exam in 2021. Joey enjoys working out, spending time outdoors, and hanging out with family and friends in his free time.