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James McGlynn  |  June 24, 2019

THE INSURANCE market for long-term-care coverage has had a checkered history—and yet there’s an increasing need for LTC insurance among aging baby boomers. My advice: Forget the original standalone insurance products and instead focus on the new hybrid policies.

What went wrong with the original standalone products? They proved to be underpriced. With policyholders living longer, insurers found themselves paying out more than anticipated. Policyholders also didn’t drop their policies as often as insurers expected—and the low lapse rate meant insurance companies had less chance to book profits while incurring no LTC expenses. In response, insurers dramatically raised premiums. This repricing led to a plunge in sales, scaring consumers away from all LTC insurance.

Hybrid LTC policies, which twin a life insurance policy or a tax-deferred annuity with a long-term-care benefit, are the best solution I’ve found. They’re effectively high-deductible insurance policies. Let’s say a client buys a hybrid LTC policy with a $50,000 lump sum. The insurance company won’t have to pay out any of its own money until $50,000 of expenses have been incurred.

Most hybrid policies are life insurance products that offer an LTC benefit, and that’s what I chose for myself. Why? A hybrid life policy provides greater LTC benefits per dollar invested. But if someone isn’t healthy enough to qualify for a life policy, the annuity might be worth considering.

How does a hybrid life policy work? The LTC coverage is designed as an acceleration of the life insurance policy’s death benefit. These policies aren’t cheap—but they offer guarantees that standalone policies don’t.

For starters, premiums should never increase. If policyholders change their mind and want a refund, they can get their lump sum returned. If they have LTC expenses, they can use a multiple of the original lump-sum payment for LTC expenses tax-free. Upon death, if any LTC expenses have been less than the policy’s death benefit, the policyholder’s beneficiaries receive the difference tax-free. Policyholders may also have the option to pay extra each year to get unlimited benefits. That would eliminate one of retirement’s biggest financial risks—catastrophic LTC expenses.

I hear three major objections to hybrid policies. First, they involve a steep upfront cost. But keep in mind that it’s possible to buy these policies out of current income, rather than with a lump sum. Second, they’re more expensive than standalone policies. Many believe that the standalone policies are now priced correctly, but there are still no guarantees that premiums won’t increase over the next 25 years or more. Third, because of the bad experience with standalone LTC policies, many consumers distrust anything having to do with LTC insurance. Indeed, if I hadn’t carefully researched the specific company, product design and refund guarantees on the hybrid policy I bought, I’d have probably just self-insured and opted to worry about LTC expenses if and when the time came.

The average age to purchase an LTC policy is age 59. I purchased my hybrid policy at 56. The looming unknown expense of LTC makes retirees fearful they won’t have enough savings at some unknown future date for either themselves or their spouse. But with my LTC expenses covered by my hybrid policy, I shouldn’t have any major expenses arising in my 80s—and that’ll allow me to spend my retirement savings with far less worry.

James McGlynn CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous article for HumbleDollar was Last Call.

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