Determining whether hybrid long-term care insurance is the right choice for you and your family will depend on your individual needs and budget. While a hybrid long-term care insurance policy — which combines traditional life insurance with long-term care insurance — has added coverage and flexibility, those benefits come with a higher cost.
What is hybrid long-term care insurance?
Hybrid long-term care insurance is commonly structured as a life insurance policy with a rider attached that provides LTC benefits. This policy covers you if you can no longer take care of yourself and need assistance in a facility or at home. It may also pay a death benefit to your beneficiaries when you die unless you exhaust your LTC benefits and deplete the policy. If you don’t end up using the long-term care coverage, your beneficiaries get a death benefit a bit more than the total premiums paid.
By contrast, a standalone life insurance policy pays your family a lump sum of money if you die while the policy is active. Standalone LTC policies only pay for assistance with daily living activities (like bathing or dressing) or memory care and generally work on a use-it-or-lose-it basis, meaning you may not receive a benefit if you never need qualifying LTC services. It functions more like an individual Disability policy as ongoing protection with no underlying asset.
A standalone long-term care insurance policy’s benefit reimburses you or directly covers the costs associated with assisted living — whether it’s in a facility or at home. Benefits are typically paid monthly up to defined maximums. Policies may also come with lifetime maximums, and you can scale these up and down based on money available for premium.
To activate the benefits of a long-term care policy (and the long-term care benefits of a hybrid life insurance policy), you must be unable to independently perform two of the six activities of daily living (ADLs).
The activities are bathing, eating, getting dressed, maintaining bowel or bladder continence, using the toilet, and transferring or moving from one place to another. [1]
What are the pros & cons of hybrid life insurance with long-term care?
When comparing a traditional long-term care insurance policy with a hybrid long-term care insurance policy, there are a few things to consider.
Pros of hybrid long-term care insurance
Locked premiums: With a hybrid long-term care policy, the amount you pay won’t change. By contrast, the rates charged for many long-term care policies may rise over time, risking the loss of coverage if you can’t pay the updated premiums. Long term care policies are often guaranteed renewable contracts which only promise the policy remains in force with sustained premiums whereas non-cancellable offers a guarantee on the original premium in relation to the benefit.
Flexibility in how benefits are paid out: Long-term care insurance policies are usually based on reimbursement: You pay for care, then submit receipts. Hybrid long-term care policies usually pay a set amount over a period of time as either reimbursement or indemnity. Indemnity benefits generally provide a lower payout which may be preferable in exchange for the flexibility on how the benefit is used. It also reduces the administrative burden of providing receipts. Either benefit will typically extend a monthly payment up to a maximum as part of a lifetime maximum. The time horizon for most LTC benefits range from three to seven years. For example: You’d get $3,000 a month for three years if you have a $108,000 long-term care maximum. You also have the flexibility to pay a family member to care for you at home.
Spousal discounts: Many hybrid long-term care policies offer a discount if spouses buy their policies together because married couples are less likely to make a claim or if they do make a claim, are more likely to defer doing so than a single person.
Death benefit for your beneficiaries: In addition to providing LTC benefits, a hybrid policy has a death benefit component. The amount of the death benefit is dependent on whether you use the LTC benefit and how much of it you use. The death benefit will be smaller if you use the policy for LTC, and larger if you don’t use the benefit.
With a standalone LTC policy, there is no death benefit. If you don’t end up using the policy, you and your heirs do not get a refund for the money spent on the policy. Insurance carriers are transitioning LTC protection to these contracts for a couple of reasons. It allows restoration of non-cancellable guarantees on the premium, eliminates the use it or lose it conundrum with standalone LTC policies and for the carrier, provides a ceiling on lifetime benefits. Due to poor assumptions on many LTC contracts, carriers were forced to reprice in force policies or sunset products as individuals were living substantially long while on claim than anticipated.
Cons of hybrid long-term care insurance
Cost: Hybrid long-term care policies are more expensive than traditional long-term care insurance policies (see more on costs below).
Not everyone will qualify: Hybrid long-term care policies require medical underwriting. If you have high-risk medical conditions — for example, a history of cancer, stroke, or heart attack — it may be difficult to be approved.
Complexity: Hybrid policies can vary in how benefits are paid, how inflation protection works, how the death benefit is reduced and what happens if the policyholder cancels.
How much does hybrid long-term care insurance cost?
Prices vary widely by age (the older you are when you buy, the more expensive it will be), health (healthier people will have lower premiums), and marital status (spouses who buy policies together often get a discount).
The way the policy is structured, including whether your benefit grows with inflation, how long you have to wait before benefits are paid out, and your benefit amount, will influence the cost as well.
Many hybrid long-term care policies are paid with a single, one-time premium, but that is not the only option. Some hybrid policies may offer limited-pay or ongoing premium options, depending on the insurer and policy structure.
For instance, a healthy 55-year-old male applicant could expect to pay a lump-sum premium of about $100,000 for Lincoln Financial’s MoneyGuard Fixed Advantage policy for a 6-year benefit period and 5% compound inflation rider. In the first year, the policy provides $3,657 as a reimbursement benefit or $2,926 as an indemnity benefit per month. Should this hypothetical applicant go on claim at age 85, the policy will have grown to provide $15,806 as reimbursement and $12,645 as indemnity benefit for up to a 6 year benefit window. If the insured never makes a claim, at passing there would be the $100,000 of original premium available as death benefit.
Self insuring is expensive and many individuals prepare for retirement with tax deferred accounts. Compounding the expense is taxation on distributions from a 401k or IRA. LTC benefits from a policy are received tax free. As individuals accrue assets, reallocating a portion towards LTC protection functions as a tax diversifying indemnification of your estate.
Alternatives to hybrid long-term care insurance
A hybrid long-term care policy isn’t the only way to pay for assisted living and other care expenses. Here are the other options with each type’s pros and cons.
Traditional long-term care insurance
The traditional type of long-term care insurance costs less than hybrid long-term insurance. Also, premiums are not fixed, and there is no death benefit.
How much does traditional long-term care insurance cost?
Long-term care insurance is generally less expensive than hybrid long-term care policies with similar long-term care benefits because it doesn’t include a life insurance component.
An annual premium for a healthy 55-year-old applicant for a policy providing $10,000 in monthly benefit for three years could cost $458 monthly according to Mutual of Omaha’s long-term care calculator. This assumes 3% compound inflation and while not apples to apples with the hybrid product alluded to above, the premium outlay for renting protection versus owning via the permanent life insurance death benefit is clearly more affordable for those unable to commit large sums of cash.
Some long-term care policies will pay for your care costs for as long as you live, but most policies have limits on how long benefits last, or how much they’ll pay in total. [2]
Self-funding long-term care
Self-funding your long-term care with your savings and/or other assets will save you money on premiums. However, care — especially full-time care — is expensive, potentially taxable if relying on cash from tax-deferred retirement accounts, and you risk needing care for longer than your budget allows. If care is needed for multiple years, it can significantly erode the value of your estate. It could also mean that there wouldn’t be any assets left to leave your heirs.
How much does self-funding long-term care cost?
Assisted-living care can cost thousands of dollars per month. These are the median costs for common long-term care services. [3]
In-home care: The rate for non-medical home health aides is $35 per hour. At 44 hours of care a week, annual costs total $80,080.
Community and assisted living: Adult day health care, which offers a break to caregivers, has a median annual cost of $24,700 based on five days of usage per week. Assisted-living facilities, which provide an intermediate level of long-term care, have a median cost of $6,200 per month, or $74,000 annually.
Nursing-home facilities: The median cost for a semi-private room in a nursing home is $315 per day, or $114,975 annually, while a private room costs $129,575 per year.
These costs are expected to rise with inflation, and actual long-term care costs can vary by state, city, care setting and level of assistance needed.
Using Medicaid
Medicaid is a joint federal and state program for people with limited income and assets. It can cover seniors, low-income adults, families, children, pregnant women and people with disabilities. Medicaid can also pay for long-term care if you meet the eligibility rules in your state. Rules and requirements apply.
For example, if you’re not already receiving care when you join the program, Medicaid will choose a care provider for you and your options will be more limited than if you pay on your own. What’s more, using Medicaid could greatly reduce what’s left for a surviving spouse.
Here are the details of how Medicaid works and how to qualify for it.
How does Medicaid pay for long-term care?
Medicaid covers long-term care expenses, but you might not qualify right away. To be eligible for Medicaid, you need to make under a certain income — usually below 133% to 138% of the federal poverty level — and cannot exceed a maximum limit in owned assets. [4]
When applying for Medicaid, you’ll need to release financial documentation from the past five years to the Department of Social Services. This is referred to as the look-back period and affects whether you receive benefits. Screeners will also consider any assets you transferred out of your name in those five years.
Long-term care riders only pay for the first five years of disability. If you plan ahead, Medicaid can pick up where your hybrid insurance plan leaves off. You’ll probably need to carry out a Medicaid asset spend-down.
How to qualify for Medicaid
If your assets don’t already make you eligible, you can go through a process called a Medicare asset spend-down. Here’s what it entails and which assets are considered countable for that purpose.
What is a Medicaid asset spend-down?
Decreasing your net worth to meet Medicaid’s eligibility criteria
There are a few ways to spend down your assets if they exceed Medicaid’s eligibility maximum:
Make home or auto improvements that are considered investments
Pay off outstanding debts
Gift your assets to family members (you’ll owe a gift tax on gifts greater than $17,000)
Open an irrevocable Medicaid trust and transfer countable assets into it
What is a countable asset?
Countable assets are capped for Medicaid eligibility and may need to be a part of your Medicaid asset spend-down plan for the cost of care to be covered. These include:
Savings and checking accounts
CDs and money market accounts
Stocks
Bonds
Real estate that isn’t your primary residence
What are non-countable assets?
Your non-countable assets don’t need to be considered in your Medicaid asset spend-down plan. These include:
Your car
Your primary residence (varies by state and depends on the home’s value)
Retirement accounts, such as IRA or 401(k)
Pre-paid funeral or cremation
Some life insurance policies
Personal belongings
What should you compare before buying hybrid long-term care insurance?
Do not choose a hybrid policy based only on premium. Compare the benefit details that affect how much long-term care coverage you can use, when benefits start and what your beneficiaries may receive if you never need care.
Key details to compare include:
Total long term care benefit pool
Monthly benefit amount
Benefit period
Elimination or waiting period
Inflation protection
Premium payment options
Death benefit amount
How using care benefits reduces the death benefit
Whether benefits are reimbursement-based or cash/indemnity
Whether family caregivers can be paid
Surrender value or return-of-premium options
Spousal discounts
Underwriting requirements
Tax considerations
Financial strength of the insurer
Before you buy, ask your advisor or agent to explain the details in plain language. Good questions include: How much long-term care coverage can I use? How much can I receive each month? How long do benefits last? You can also ask which tradeoffs matter most for your budget, care preferences and estate planning goals.
Is hybrid long-term care insurance right for you?
Planning ahead is pivotal for long-term care. Whether you opt for a hybrid long-term care policy, a standalone long-term care policy, to depend on Medicaid, or to self-insure, talk to a financial advisor early on so you can cover your care while protecting your heirs.
Hybrid long-term care insurance FAQs
Is hybrid long-term care insurance worth it?
Hybrid long-term care insurance may be worth it if you want long term care benefits, a death benefit and more predictable premiums, and you can afford the higher cost. It may not be the best fit if you only need lower-cost long term care coverage.
What happens if I never use the long-term care benefit?
If you do not use the long-term care benefit, your beneficiaries may receive a larger death benefit when you die, depending on the policy.
Does using long-term care benefits reduce the death benefit?
Usually, yes. When a hybrid policy pays long-term care benefits, the death benefit available to beneficiaries is typically reduced.
Is hybrid long-term care insurance better than traditional long-term care insurance?
Neither option is automatically better. Hybrid policies include a death benefit and may offer fixed premiums. Traditional long-term care insurance may cost less, but it usually does not pay beneficiaries if care is never needed.
Can you get hybrid long-term care insurance if you already have health issues?
It depends on the insurer and the condition. Hybrid policies generally require medical underwriting, so some health conditions may make approval more difficult or increase the cost.
Does Medicaid count life insurance as an asset?
It can. Medicaid treatment of life insurance depends on policy type, face value, cash value and state rules. Speak with a Medicaid planning professional before relying on Medicaid or transferring assets.
