What is a hybrid long-term care/life insurance policy, and how does it compare to traditional long-term-care insurance?

By: Kimberly Lankford

The cost of long-term care can devour your retirement savings. The median cost of a private room in a nursing home is more than $102,000 per year, and more people are receiving care in an assisted living facility or in their own homes, with median costs of about $50,000 per year, according to Genworth’s 2019 Cost of Care study. Care costs can vary a lot depending on your location, and the price tag can be much higher for people with dementia who need specialized care. Some people buy long-term-care insurance to protect their savings from those potential costs. But if you don’t end up needing care, you usually don’t get anything from these policies.

A growing number of insurance companies are offering hybrid long-term-care/life insurance policies that either pay benefits for long-term-care costs or provide your heirs with a death benefit that reimburses the premiums you paid into the policy. The benefit triggers are generally the same as they are for standalone long-term-care policies — they’ll pay out if you need substantial assistance with at least two out of six activities of daily living (bathing, dressing, toileting, continence, eating, or transferring) or if you have severe cognitive impairment and need substantial supervision. And you can usually use the policy in a nursing home, assisted-living facility or for care in your own home, just like you would with traditional long-term care. There are pros and cons to both types of policies, and it’s a good idea to get quotes for both hybrid and standalone long-term care insurance when searching for coverage.

How the hybrid policies work. In most cases, you pay premiums for a hybrid policy with a lump sum or for a limited number of years, though some newer policies allow you to stretch premiums to age 100. If you die without needing care, your heirs can receive a death benefit that may be worth slightly more than the amount you paid in premiums. But if you do need care, you can usually receive about three or four times as much as the death benefit for long-term-care costs (any money you use for care is subtracted from the death benefit).

For example, a 60-year-old woman who deposits about $101,000 into a hybrid policy could receive $5,000 per month in long-term care benefits for up to five years, with benefits adjusted by 3% each year for inflation — adding up to a $318,500 benefit pool that grows through time with the inflation adjustment. If she doesn’t need care, her heirs could receive a $120,000 death benefit which reimburses the initial deposit plus interest. Or she could pay about $11,835 per year for 10 years for the same coverage, with no premiums after that. In both cases, she’d have a 90-day waiting period before coverage kicks in.

If she wanted a standalone long-term care policy instead, she could pay about $4,500 per year for a similar policy with a $5,000 monthly benefit, 90-day waiting period, five-year benefit period, and 3% inflation adjustment. She could get a 10–15% discount if she applies for the policy with her spouse. But the standalone policy has a few key differences from the hybrid coverage: The insurer can increase her annual premiums in some situations, and they don’t stop after 10 years (although premiums are usually waived when you’re on claim). Also, she won’t receive anything if she dies before needing care.

It’s a good idea to compare the cost and coverage for both standalone and hybrid policies. The cost difference between the two types of policies can vary depending on your age, gender, state, and whether or not you’re buying with a spouse or partner. Hybrid policies, for example, are often more competitive for single people in their 40s and 50s (especially single women, who generally pay about 50% more than single men for standalone long-term care policies).

Your current financial situation could also impact which type of policy fits best. For example, if you have extra funds sitting in low-yielding assets like a savings account or CD, depositing the funds into a hybrid policy instead could be a good value. On the other hand, if you have limited assets today but regular cashflow from a pension or rental income, allocating some of that to a traditional policy might fit better.

It’s also important to compare other nuances of the policies. Some hybrid policies don’t have a waiting period before coverage kicks in, which can make a big difference in your out-of-pocket costs, especially as care costs rise with inflation in the future. For example, if you have a 90-day waiting period and have to pay $5,000 per month yourself for care, that’s about $15,000 out of your pocket before the policy starts paying out — in today’s dollars. But a policy with a shorter waiting period may have higher premiums, so it’s important to do the calculations when assessing the trade-off.

Also, some policies are “cash indemnity plans,” which means that you’ll receive payouts as long as you qualify under the benefit triggers and have fulfilled any waiting period. Other policies require you or the long-term care facility or caregiver to submit bills or receipts before you can receive the money, which can lead to administrative complications.

Hybrid policies can work well if you have a permanent life insurance policy you no longer need — you can do a tax-free 1035 exchange into the hybrid policy, using the old policy’s cash value to pay the hybrid policy’s premiums tax-free (you can also make a 1035 exchange into a standalone long-term care policy, but it becomes more complicated if you have to pay annual premiums). See What to do with life insurance you no longer need for more information about tax-free 1035 exchanges.

There are several ways to protect your retirement savings from potential long-term-care costs, but the choices can be complicated. It’s a good idea to get help from a trusted expert who knows all of the options and can help you assess the best solution for your financial plans.

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Saturday Insurance Services, LLC (“Saturday” or “Saturday Insurance”) is a licensed, digital insurance advisor. All tools, quotes, and information provided by Saturday are for educational purposes only and based on the limited information, if any, provided by you. We urge you to consult with your financial and tax advisors before making any purchase decisions. All quotes and estimates are non-binding and are not to be construed as a guarantee you will be able to purchase insurance. Availability of insurance and final pricing is determined solely by our insurer partners and subject to their review and acceptance of a completed application. All product guarantees are subject to the claims-paying ability of your insurer.