Hybrid Policies

INSTEAD OF BUYING traditional long-term-care (LTC) insurance, you could purchase hybrid LTC insurance, which is a cash-value life insurance policy that’s designed to cover long-term care. We discuss cash-value policies later in this chapter.

With a hybrid policy, you pay a fixed amount of premiums to an insurer in a single upfront lump sum or over a set period, such as 10 years. If you don’t need care, your heirs receive 100% of your premiums back, plus a modest amount of interest, upon your death. If you do need care, you’re able to collect monthly benefits up to a lifetime maximum, just like a traditional LTC policy.

Total benefits available from a hybrid policy are typically three to five times your premiums. In effect, the policy leverages your premiums, so you can cover a much larger amount of long-term care. The caveat: Each dollar of benefits you receive reduces your return-of-premium death benefit until it’s exhausted. The upshot: You might think of your initial premium as effectively acting as the policy’s “deductible”—a deductible you’ll never pay if you don’t need care.

Hybrid policies can be a good choice for individuals or couples who are comfortable funding the first few years of LTC out of pocket, but want insurance if care proves especially expensive. Hybrid policies also appeal to folks who hate the idea of paying years of premiums for traditional LTC insurance, but never getting anything back. And because hybrid premiums are guaranteed, you avoid the risk of large premium increases later in retirement. Sales of hybrid policies have been picking up, even as demand for traditional LTC insurance has waned.

Hybrid policies aren’t for everyone. Premiums may be unaffordable, even if you spread the cost over 10 years. There’s also an opportunity cost: You forgo the investment returns that you could have earned on the funds if you’d kept them yourself.

An alternative to a hybrid life insurance policy is a tax-deferred fixed annuity with an LTC rider. If you don’t need long-term care, the money continues to collect interest. If care is needed, you can usually get access to a sum equal to some multiple of your original annuity investment. When it comes to LTC benefits, these annuities typically don’t provide as much leverage as a life insurance hybrid policy, so they aren’t as good value. On the other hand, annuities with an LTC rider have looser underwriting standards, so they might be the right choice for folks who don’t qualify for a traditional or hybrid LTC policy.

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