The Problem With Buying Bundled Life and Long-Term Care Insurance

Life insurance and long-term care (LTC) insurance are types of insurance that help clients save big on expensive end-of-life and long-term care expenses. You might naturally assume that bundling two policies together into a hybrid life insurance policy would naturally be the best way for you and your family members to save money. However, some financial advisors argue that hybrid life insurance disadvantages might outweigh the insurance benefits. Here’s what you need to know about bundling life and long-term care insurance.

The high cost of long-term care

It’s not cheap getting older. Between home care, health care and the costs of assisted living facilities and nursing homes, long-term care expenses can reach upwards of $9,000 per month. That figure does not even factor in the costs of paying off debts or final expenses after someone dies. Unfortunately, these costs are constantly on the rise due to the cost of goods and services. Inflation hasn’t helped matters, either.

Many people don’t have the savings to pay for such expenses upfront, which is why insurance is a good option to offset the cost and cover much, if not all, of the cost of long-term care. Long-term care insurance covers monthly costs of care while the covered person is still alive.

Past price problems with standalone policies

Hybrid policies are popular for some understandable reasons beyond their twofer allure and the fact that you may never need or use standalone LTC insurance.

Price stability leads to those additional attractions. The premiums on a standalone policy can increase over time; a hybrid policy’s premiums don’t increase. This is of particular concern given the double-digit premium increases for standalone care policies sold in the 1990s and early 2000s.

But the steep hikes may have been a one-time glitch resulting from industry inexperience with a relatively new form of insurance, say experts. Insurance companies underpriced these policies to begin with, says Larry Ginsburg, a financial planner in Oakland, California. “When insurance companies started offering long-term care insurance 30 years ago, they used historical data that showed that less than 30 percent of people would use LTC. They forgot to factor in the miracle of modern medicine,” he says.

Though standalone premiums could rise, then, advisors emphasized that this is much less likely with new policies than with older ones. “There is no way to guarantee that your rate will or won’t increase on a long-term care standalone policy. But actuaries are pretty confident that if there are rate increases, they won’t be nearly as big as earlier policyholders have had,” says Daniel Moisand, a financial planner in Melbourne, Florida. He advises that people being pitched hybrid policies on the basis of price resist “the scare tactic that you’ll have huge rate increases when you’re 80” if you choose a standalone policy.

Coverage cost for hybrid life insurance

Most hybrid life insurance plans require either monthly or single lump premiums. The average annual premium for a hybrid life-LTC insurance policy can range anywhere from $950 to $6,700, depending on your age, health, and coverage options.

Why is life insurance important?

Life insurance provides a lump sum payout upon the policyholder’s death to their family members or other beneficiaries. This payout is meant to cover any debts or final expenses the policyholder may have accrued, as well as provide for surviving family members.

Both long-term care and life insurance policies can prevent the financial stress that comes with the high cost of long-term care and final expenses.

Will you need more life insurance when you're old?

Since the recommended age to buy long-term care insurance is in your 50s, there’s also the question of whether you really need additional life insurance that late in life. Since few retirees still have dependents, the need for life insurance can diminish or even disappear. As retirement approaches, say some advisors, people are better off putting any premium dollars they spend entirely towards better long-term care coverage.

“If you have a life need, buy life insurance. If you don’t need life insurance, why are you paying for that coverage?” says Sharon Luker, a financial planner in Plano, Texas. By not spending money to insure your life, Luker says, “you can get a lot more long-term care coverage for the money.”

An illustration demonstrates this. According to pricing shared by the American Association for Long-Term Care Insurance’s Slome, a couple who are both healthy and age 62 could together pay $4,600 a year for a traditional long-term care insurance policy that would offer them each $257,000 in benefits to apply to long-term care when they reach age 85. (Such benefits should suffice to cover the average nursing-home stay of about two-and-a-half years.)

A comparable hybrid policy that would provide each partner with $240,000 in benefits at age 85, and that would pay a death benefit of about $160,000 each if one or both don’t need long-term care would cost the same couple a combined $13,335 a year.

The hybrid policy, then, would cost nearly three times as much as the cost of a traditional policy with comparable long-term care benefits. Let’s run the math on buying the policy when both partners are 60 — which is actually a little later than some advisors suggest — and using it at 85, the average age at which long-term care is required.

With the hybrid policy, you'd pay more than $8,500 extra per year for 25 years, for a total of $218,375 in additional premiums. In exchange, the surviving spouse would receive a $160,000 death benefit when their husband or wife dies, and their estate would receive $160,000 when they die.

Is $320,000 received late in life, even after death, a better bet than saving $218,000 or so while you're younger? For many people, the answer might be no. But it may depend ultimately on factors including your ability to pay the extra premiums.

Also, while this example is representative, the best choice also depends on the actual premium differences for you. Actuarial math is complicated, the AALTCI’s Slome points out, and richer hybrid and standalone policies might be more comparable in price. In some instances, standalone policies could even cost more than hybrid alternatives. “The variances between policies are enormously complicated, with prices, options, and features that can vary significantly,” he says. “It really pays to comparison shop and seek advice from a specialist.”

What is a hybrid life and long-term care insurance policy?

Life insurance and long-term care insurance cover different parts of the aging process. As people age, they may require long-term care in order to keep up with their healthcare needs and the needs that come with everyday living. Whether they receive long-term care from an in-home caregiver or reside at a long-term care facility, they will have to keep up with the cost of daily care. In addition, people may start to worry about the financial impact their passing may have on their family members.

Hybrid life and long-term care insurance policies mitigate both of these concerns with one policy. It’s a single policy that combines long-term care and life insurance benefits. With one monthly premium, you can receive both types of coverage with one insurance plan.

An even more compelling allure to the hybrid life and LTC is that if you don’t use the long-term care policy (or spend it down completely), you can roll the funds into the life insurance payout for your next of kin. Even if you don’t use the LTC coverage, you don’t waste the money you’ve paid in premiums over the years.

Types of hybrid life insurance products

Depending on your long-term care needs, you can choose from a few different hybrid life insurance policies. Here are three of the most popular hybrid life-LTC insurance options:

• Linked-benefit life insurance - This is the most common type of hybrid life insurance. It provides both long-term care insurance and a death benefit payout under one monthly premium.

• Long-term care rider on a life policy - When you purchase a standalone life policy, you can add a long-term care rider that covers certain long-term care expenses. This will reduce the amount of your death benefit, but it can be a more affordable way to get long-term care insurance without purchasing a linked-benefit policy.

• Critical or chronic illness rider on life insurance - This is another way to add a type of long-term care coverage to a traditional term life insurance policy. These reimbursements may only go toward costs related to a chronic or critical illness, but they will still cover many of the expenses that come with long-term care.

Hybrid long-term care insurance pros and cons

Before deciding if you should purchase long-term care combined with life insurance, it’s important to consider all the pros and cons of a hybrid insurance plan. A hybrid policy may be the best option in some situations, but it’s certainly not ideal for all situations. Here are some of the most significant hybrid long-term care insurance benefits and downsides you should be aware of before committing to these policies.

Benefits of hybrid life insurance

According to Jesse Slome, Director of the American Association for Long-Term Care Insurance (AALTCI), U.S. residents bought over 250,000 hybrid life-LTC insurance policies last year. It’s easy to see why. Combining long-term care insurance and life insurance comes with several benefits.

Consistent premiums

One of the biggest negatives that come with individual life or long-term care policies is price inconsistencies. Standalone policies have a history of serious price problems. They are susceptible to premium increases and price hikes over time. In the 1990s and early 2000s, some premium payments even increased by double digits nationwide.

Hybrid life and LTC insurance policies have set rates that won’t change over time. This kind of premium consistency is a major draw for many looking for coverage as they age. However, modern standalone policies have a much lower chance of increase compared to their 1990 and early 2000 counterparts.

Flexibility

The AALTCI estimates a 50/50 chance that a person will use their long-term care insurance policy before they die. For someone with a standalone long-term care policy, it’s a flip of the coin whether they use their coverage or just throw all their years of premiums down the drain.

With a hybrid life-LTC policy, you get the flexibility to have both types of coverage. And if you don’t end up using your long-term care insurance, the additional funds can be added to your life insurance’s death benefit amount.

Alternatively, if the policyholder’s long-term care insurance coverage runs out, you may be able to draw from the death benefit payout to continue paying for long-term care. However you end up using the life or long-term care benefits, you can generally enjoy more flexibility with a hybrid policy.

Easier to get

It’s not always easy to qualify for long-term care insurance, especially as you get older. Providers know long-term care is incredibly expensive, which means higher risk. But hybrid life and long-term care insurance policies can have less stringent underwriting policies, making it easier for many to qualify for coverage. You’ll likely still need to schedule a medical exam, but the requirements could be less stringent.

Cash value

Standalone long-term care insurance covers only the cost of long-term care. Unfortunately, plenty of expenses can arise from long-term care. If you have a standalone LTC policy, you’d have to pay for these costs out of pocket.

With a hybrid policy, you have the cash value of the life insurance element that you may be able to draw from to cover expenses outside of long-term care. With every premium you pay, you can increase the cash value of the life insurance part of the hybrid policy, which may be used for a rainy day.

Hybrid life insurance disadvantages

While purchasing a hybrid life and long-term care insurance policy may seem like a no-brainer, you should still understand some of the negative aspects of hybrid long-term care insurance before you decide whether it is right for you. Here are a few common downsides of hybrid life insurance policies.

Not the most cost-effective option

Cost is one of the primary considerations people take into account when shopping for an insurance policy. While there are definite benefits to having hybrid life and long-term care insurance, it’s not the most cost-effective option.

Hybrid policies are typically more expensive than standalone life or long-term care insurance. For example, a healthy 62-year-old couple would pay around $4,600 in annual premiums for a traditional standalone long-term care insurance policy with $257,000 in benefits for each person. A hybrid policy with long-term care and life benefits would provide the same couple with $240,000 in long-term care coverage and a death benefit of around $160,000 each. Although it has similar long-term care coverage with the additional death benefit payout, the average cost of hybrid long-term care insurance for this couple would be a combined $13,335 per year. That’s an additional $8,735 annually compared to a standalone long-term care policy, which can really add up over the years.

Longer waiting periods

You always want your insurance benefits to kick in immediately, but it takes some time to complete the underwriting process. Typically, hybrid insurance policies take longer for the benefits to kick in compared to traditional standalone policies. Hybrid policies have elimination periods of around 90 days, while traditional plans can have shorter waiting periods of only 30 days.

Payment for long-term care can decrease cash value and benefits

While hybrid policies can transfer unused funds from long-term care into the death benefit for more flexibility, the converse is also true. If you need substantial long-term care payouts, it could take funds away from your death benefit. That death benefit may not even exist if all the policy’s funds went toward long-term care.

May not include inflation protection

Inflation is a serious concern with any type of long-term planning, especially when the cost of long-term care is consistently on the rise. Standalone traditional insurance policies can offer inflation protections that increase your coverage over time. Of course, your premiums will change, too.

Because hybrid life and long-term care insurance policy premiums don’t change, these policies generally don’t offer any inflation protection option. Your coverage will stay the same regardless of inflation or the rising costs of long-term care.

Fewer tax benefits

Although the payouts for both standalone and hybrid insurance policies might be tax-free, self-employed individuals can deduct only the premiums for long-term care insurance. With a standalone long-term care policy, the entire cost is tax deductible. With a hybrid policy, you’ll only be able to deduct the portion of your premiums that go toward long-term care coverage.

When to buy a hybrid insurance policy

Although hybrid life insurance plans and long-term care insurance plans aren’t the most cost-effective options for most buyers, they could be the best option for some situations. The most common situation is when someone wants to leverage their existing life insurance policy to pay for long-term care.

If someone with a life insurance policy wants to add long-term care coverage, they can perform a 1035 exchange. This transforms their permanent life insurance policy into a hybrid life and long-term care policy. They can then use their policy to cover long-term care costs without losing access to their life insurance.

You can also perform a different kind of 1035 exchange. This means that instead of moving the cash value to a hybrid policy, you transition it to an annuity. This will defer the payouts until you actually need long-term care, leaving the rest to your beneficiaries.

A 1035 exchange is ideal for someone who may have bought a life insurance policy when they were young. As they reach retirement age, they may no longer need the same life insurance coverage but want to add long-term care coverage. The main downside to a 1035 exchange is that you will have to pay taxes on the difference between the cash value and what you put into it.

Other ways to use life insurance to pay for long-term care

Hybrid life-LTC insurance policies aren’t right for everyone, but having that long-term care coverage provides peace of mind, especially as you age. You can still find alternatives if you want long-term care coverage but don’t want to purchase a hybrid policy.

The most common alternative is to add a long-term care rider to your universal life insurance policy. While these coverages aren’t as robust as a standalone long-term care or hybrid policy, they still offer some coverage without impacting your life insurance policy. However, these riders can’t be added to an existing life insurance policy. You’ll have to add them when you purchase the policy.