25 May Hybrid vs Traditional

Why Buy Hybrid LTC Over the Traditional LTC?

When the baby boomer generation continues to mature, the issue of what to do with long-term care costs is only becoming more significant. With a national median cost of $8,500 per month for a private room in a nursing home, having to pay the expense of long-term care will easily drain a savings account.

There is no way to know if you are going to need long-term treatment. There is also no way to know how many months or years of care you may need. Regardless, you should consider covering yourself from the potentially crippling expense of long-term care insurance. 

From simple stand-alone policies to hybrid life insurance and long-term care policies to annuities with long-term care benefits, insurance providers have developed a variety of ways for consumers to protect themselves against the risk of needing to pay the expense of long-term care. 

Key Factors to Consider

• Despite the fact that the majority of people aged 65 and up will require long-term care at some point, the majority do not have long-term care insurance. 
• The majority of people do not have long-term care insurance because it is costly and complicated.
• Beyond the traditional, stand-alone insurance, insurance providers have established a variety of ways to cover the costs of long-term care.
• Other options include simplified long-term care policies, hybrid policies, and annuities with long-term care benefits. 

Long-Term Care Insurance

The majority of people do not have long-term care insurance because it has historically been costly, difficult to grasp, and fraught with uncertainty over premium rises on mispriced older plans. According to the US Department of Health and Human Services, approximately 70 percent of people turning 65 today would need long-term care at some stage. According to the American Association for Long-Term Care Insurance, just over 10 million people have a policy.

Most people would purchase it on their own rather than through their employer. This means there is no one to subsidize the expense or choose a good policy for you. Attempts are being made by insurance providers to improve this. Smaller plans are a way for insurance providers to hit the middle-market customer. Insurance providers are selling policies with lower restrictions and more adaptable premium payout periods.

One insurance program in the beginning research and pilot stages is a term life insurance plan that converts to long-term care insurance later in life. There is another program that is a flexible retirement plan, such as a 401(k) or IRA, with long-term care insurance built in. Similar to how the Medicare replacement market operates, there is a possibility we may see mandatory, universal, pay-roll financed catastrophic long-term care insurance. Those options, however, do not yet exist.

Stand-Alone Long-Term Care Insurance

Since the market’s height in 2002, when over 75,000 people purchased plans, stand-alone long-term care insurance has declined in popularity. Just 56,000 people purchased policies in 2018. This is a 92 percent decrease. Further, from 1998 to 2003, mass middle-market consumers made up a greater portion of the market. These consumers were aged 55 to 64 with an average annual income of $75,000 and assets of $100,000. 

The premiums paid by insurance providers to those older care policies turned out to be too low. Adding to this, newer policies that better represented long-term care risks were much more costly. This resulted in a major decrease in the pool of customers who could afford them. Long-term care insurance can be difficult to grasp. Few people know what it is and how it works. 

A rational solution to these issues is to create a product that is both affordable and understandable. For example, in late 2018, New York Life announced the launch of NYL My Care. This is a new long-term care insurance policy marketed to middle-class customers as “simplified, affordable, and versatile.” 

This new insurance plan provides bronze, gold, and platinum pre-designed policies. Each of these levels have higher lifetime maximum benefits, monthly maximum benefits, deductibles, and premiums. These policies are structured to look like health insurance plans, which are more common to customers. To keep premiums down, they use a deductible instead of an elimination period and co-insurance. 

These policies can be tailored in the same manner as other stand-alone long-term care insurance plans. Some features include automatic compound income growth to protect against inflation. Insurance providers discovered a difference in what mass middle-class consumers are willing to spend. On average, this equals about $1,700 per year.

Advantages and Disadvantages of Stand-Alone Long-Term Care Insurance

Those who can handle today’s insurance rates, including possible price hikes, should consider a stand-alone long-term care insurance plan. On the other hand, you pay monthly fees for the rest of your life on a commodity that you can or may not buy. You do not get anything back if you miss paying insurance and let the policy expire. 

Hybrid Long-Term Care Insurance

Hybrid life and long-term care insurance plans deliver two forms of insurance bundled into a single package. Premiums can be set for life and not immune to inflation, as they are in stand-alone policies. Medical underwriting for a stand-alone long-term care program could be less stringent. If a continuation-of-benefits rider is included, these plans may also be beneficial for those looking for lifelong or unlimited long-term care benefits.

MoneyGuard is a hybrid policy from Lincoln National Life Insurance Company that guarantees your premium and provides a death payout to your heirs. A universal life program with a long-term care acceleration-of-benefits rider is available. If the policyholder requires coverage, it can use a portion of the life insurance policy’s death benefit to pay for covered long-term care expenses. Unlike stand-alone long-term care plans, it has no deductible or waiting period.

If you buy the Value Protection Rider, you will get 100 percent of your premiums back after five years if you plan not to keep the policy. In addition, you can buy extra coverage to protect against inflation. Clients will begin funding a program at the age of 40, allowing them 25 years to complete the process before retiring. There are also other funding options open. 

If the policy is depleted due to long-term care withdrawals, it offers a modest death benefit of a few thousand dollars to assist with funeral costs.

When married couples purchase a policy together, OneAmerica’s Asset-Sharing program provides a discount and a death benefit that pays heirs if the surviving partner dies before the long-term care services are used. Experts say that this is the only insurance on the market that covers two insureds on the same policy. The two insureds may not have to be married to benefit from the joint-insured benefit either. The insureds friends or siblings may also use it. Though it is not a revolutionary product (it has been around since 1989), it exemplifies the benefits of a hybrid strategy.

A continuation-of-benefits rider is also available. This rider includes lifetime long-term care benefits for all covered persons. It also has a variety of funding options, including paying a single premium, paying premiums for 10 to 20 years, or paying premiums for the rest of one’s life. To pay for the insurance policy, you can use an existing asset, such as a CD, or funds from a 401(k) or an IRA. This package is one of the best alternative long-term care insurance plans on the market today, if not the best. 

Midland National Life is one of the companies that has been recommended. This company offers life insurance that allows the policyholder to withdraw 2% of the death benefit per month to cover the expenses of home health care, assisted living, or long-term care. You will get 2 percent of a $500,000 policy, or $10,000 per month, for certain types of services if you purchase a $500,000 policy. 

The insurance provider pays the benefits directly to policyholders. This allows them to employ anyone they choose to care for them, including a family member. You don’t have to send receipts for reimbursement. You can also opt to take less than the monthly limit in order to extend your benefits and increase your death benefit. The death benefit may also be used during one’s lifetime to help pay for terminal or serious diseases like cancer or heart disease. 

Traditional long-term care insurance is purchased, and the cost will rise over time. If you don’t use it, you lose it. If you are safe and can get coverage, a life policy is a far safer choice than long-term care policies. 

Keep in mind, individuals with extreme, high-risk health problems are not eligible for long-term care plans or life insurance, which is a definite disadvantage. To qualify, you must be in good health. This means you must not wait so long that you lose your eligibility. However, you should not buy a policy so soon that you can’t afford it in the long run.

 

Tax Advantages of Hybrid Long-Term Care Insurance Policies

The amount expended on care is deducted from the policy’s death benefit under these types of policies. The rest of the money goes to the policyholder’s heirs tax-free. This can help with inheritance planning and lowering death taxes. The federal estate tax does not kick in until your estate is worth $11.58 million or more as of 2020. This only affects less than 0.01 percent of estates. 

Untaxed retirement account funds, such as those in a 401(k), 403(b), or conventional IRA, are taxable to the heir who receives them, unless the heir is a spouse, which affects the middle class.

The SECURE Act of 2019 repealed what is referred to as a “stretch IRA.” This is a financial planning strategy that enabled certain beneficiaries to stretch their required minimum distributions (RMDs) over their life expectancy and expand the tax-deferred status of an inherited retirement account. According to the SECURE Act, non-spouse beneficiaries of inherited retirement accounts must receive allocated funds invested in the policy by the end of the tenth calendar year following the death of the account owner.

When a person has $500,000 in an IRA but no insurance, the money will be used on medical expenses. Even if they never go to a nursing home, they will have to pay federal income tax, potential state inheritance tax, and possible state income taxes. 

The majority of the plans offered are for people who have about $300,000 in savings and want to protect it from medical expenses and death taxes. The expense of the insurance policy is a fraction of what the heirs will get. In essence, the insurance provider assists in the payment of death taxes.

Advantages and Disadvantages of Hybrid Long-Term Care Insurance 

People who want to ensure they will get something in return for their premium dollars but don’t like the “use it or lose it” element of stand-alone long-term care policies will benefit from a hybrid long-term care policy. It is also beneficial for people who wish to leave money to their heirs if they can but are fine if their heirs receive nothing because their long-term care policy has been depleted. 

However, even though this occurs, certain plans can still pay out to heirs. The long-term care rider from Nationwide provides a residual death benefit of 10 percent of the base policy number, minus any policy loans.

A disadvantage of purchasing a hybrid policy is that you may be required to pay a lump-sum premium of tens of thousands of dollars up front. You will have to pay more if you want more long-term care coverage and a larger death payout. 

It’s crucial to realize that different plans will pay drastically different death benefits and monthly long-term care benefits for the same initial payment. Also, you will not get a market rate of return on your investment. This results in a potentially significant opportunity cost as opposed to what you might have gotten from spending the money you would have put into the policy.

This form of insurance could also be inappropriate for someone who does not need life insurance. If the package does not provide inflation insurance for long-term care coverage, it might be much less beneficial by the time you access it compared to when you bought it.

Final Thoughts

Long-term care insurance and other products that cover long-term care costs protect customers’ desire to ensure that, if they do need care, they can access it in the place of their choice. Not in a potentially subpar Medicaid-accepting facility that does not have the health outcomes or quality of life they desire. People may also use these items to protect their assets from the high costs of long-term care, reduce dependence, and keep their living standards as they age.