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“Hybrid” Long Term Care Policies

Brian FisherOctober 11, 2019

Insurance

We have written numerous blogs in the last year touching on long-term care insurance and the value it lends. This month, we are going to discuss “hybrid” long-term care policies and how they might be a better alternative to the traditional long-term care policies of the past.

As a refresher, long-term is the need for assistance or supervision with the activities of daily living. There are six activities of daily living: eating, dressing, bathing, transferring, toileting and continence. Chronic illnesses, advanced age, accidents and cognitive impairments are all health-related issues that could require long-term care. Regardless of the cause, if you lose the ability to perform at least two of these daily living activities for more than 90 days, long-term care insurance would help pay the costs associated with your care. But, the knock on traditional long-term care has been the fact that there is no cash value and, that similar to auto and homeowner’s insurance, if you don’t use it, you don’t receive benefits. In addition, the premiums, which are not guaranteed to remain level, are subject to increase in the future.

The attractiveness of hybrids, is they afford the insured a couple different ways to garner a benefit. First, premiums never increase and can be locked in at inception. As mentioned earlier, this is not the case with traditional long-term care policies, which can cause strain for some insureds as premiums can increase over the life of the policy.

Second, there is substantial return of premium. Because hybrids are technically a life insurance product, they all offer some kind of death benefit or return of premium feature. In most instances, the death benefit will be larger than the sum of the premiums and will be paid out to the insured’s beneficiary tax-free. Also, some hybrids offer a return of premium feature, where the policyowner could cancel their coverage and have some portion of the premiums refunded.

Third is the option to pay the premium in one lump sum, which is not an available option with traditional long-term care. This may be attractive for people who have permanent life insurance policies that are no longer warranted in their financial plan. These policies may have large cash values that would be subject to income taxes if the policies were surrendered. However, they can be “rolled over” on a tax-free basis via a 1035 exchange. This allows insurance assets to be repositioned into a more appropriate product, which could be large enough that no future premiums would ever be needed.

In the simplest terms, hybrid products combine the benefits of life insurance with those of long-term care. If long-term care benefits are not needed, the policy will still pay out a tax-free benefit to a beneficiary. With all financial decisions, everyone’s situation is unique, and determining which long-term care solution is best resolved with the assistance of an expert. If you would be interested in learning more and having our team review your existing insurance, please reach out to your HFA advisor or our internal benefits department (610-651-2777).