Consumers who are skeptical of traditional long-term-care insurance are snapping up “hybrid” policies combining life insurance with long-term-care benefits. But are these products really a better way to manage the risk of catastrophic long-term-care costs?
Although they come in many flavors, the most popular hybrids attach a long-term-care rider to a whole or universal life insurance policy. Consumers can typically pay a single up-front premium, and if they never need long-term care, their heirs get the death benefit.
The sales pitch is simple: By paying a single premium or series of set premiums, you avoid the risk of future premium increases — an issue that has plagued traditional long-term-care policies. And many consumers have balked at the “use it or lose it” nature of traditional long-term-care policies; the hybrid’s potential death benefit removes that concern.
But those advantages aren’t as clear-cut as they sound. For traditional long-term-care policies priced today, the risk of future premium increases is very low, according to new research by the Society of Actuaries. And by handing over a large lump sum for a hybrid product, you’re giving up the opportunity to earn a market rate of return on that money.
Even so, many consumers have found the hybrid pitch persuasive. More than 200,000 hybrid life insurance policies were sold in 2015, up 37 percent from 2014, according to LIMRA, a life insurance trade group.
They’re gaining ground as “traditional long-term care insurance is becoming less of an option,” says Wade Pfau, professor of retirement income at The American College. Premium increases on policies priced years ago have made headlines, and several insurers have dropped out of the market. The number of new traditional long-term-care policies sold in 2015 dropped about 20 percent, according to the American Association for Long-Term Care Insurance.
Here’s how one popular type of hybrid product works: Two long-term-care riders are attached to a universal life insurance policy. If you need long-term care, the first rider pays down the policy’s death benefit over the course of two years. If you exhaust the death benefit, the second rider extends your long-term-care benefits for another two to four years. There’s often an option to get some or all of your money back if you change your mind about the policy.
The up-front cost is hefty: You’ll pay at least $50,000 to $75,000 to get a meaningful long-term-care benefit. You face no risk of premium increases, but that’s not much of a threat with stand-alone long-term-care policies priced today either, according to the Society of Actuaries. A major reason for the big premium increases on traditional policies priced years ago is that insurers overestimated the number of people who would allow their policies to lapse. In pricing today’s policies, insurers have tweaked their assumptions to reflect low lapse rates and low interest rates, and they have more claims data to guide pricing decisions. The result: Policies priced in 2014 have just a 10 percent chance of needing future rate increases, compared with 40 percent for those priced in 2000, the Society of Actuaries found.
While the hybrid products ensure that you’ll get something out of the policy even if you never need long-term care, they also force you to forgo a market rate of return on a large chunk of your money. In a typical hybrid product purchased today, the cash value will grow at a very modest rate, such as 2 percent. That may sound reasonable in today’s low-rate environment, but if rates rise substantially, it won’t look so attractive.
Compare your options
When weighing hybrid products against traditional long-term-care insurance policies, consider how you might invest the money that’s not spent on premiums. If you would leave it in cash or other low-return holdings and don’t foresee any need for the money, that might be an argument for the hybrid product. If you would aim for a moderate return and might need the money to cover living expenses, stand-alone long-term-care insurance may make more sense.
Consider a 55-year-old man with $75,000 in liquid assets. He could spend it all on Lincoln Financial’s MoneyGuard II, a hybrid policy, and get initial monthly long-term-care benefits of $4,820. With 3 percent inflation protection, his monthly benefit would grow to $10,092 at age 80. If he never needs long-term care, his heirs would get a death benefit of at least $115,678.
If he instead opts for a traditional long-term-care policy with a $2,430 annual premium, he can get long-term-care benefits similar to the MoneyGuard policy: an initial monthly benefit of $4,500 and 3 percent inflation protection, according to the long-term-care association. He can also invest the $72,570 he has left over.
If he can get a 5 percent annual return, he’ll have more than $82,000 at age 80, even after paying the ongoing annual long-term-care premiums — and he has the flexibility to use that money however he likes.
Whether you’re buying a hybrid or a traditional policy, be sure to consider inflation protection — because you might make your first claim 30 years down the road. Consumers should also consider how much they value a hybrid policy’s life-insurance component, which adds an extra layer of cost. For many consumers buying hybrid products, life insurance is an afterthought. “People are generally buying this for the long-term-care coverage,” says Mike Hamilton, vice president of MoneyGuard product management at Lincoln.
If you do have a real need for life insurance, a hybrid product may not be the best solution, since a long-term-care claim will eat away at the death benefit.
“If you need both long-term-care and life-insurance protection, you ought to buy them both — not just take care of whichever one comes first,” says Jim Glickman, president of LifeCare Assurance, a Woodland Hills, Cal., long-term-care reinsurer.
Examine hybrid policies to be sure you’re actually getting long-term-care benefits. Many combo products package life insurance with “chronic illness acceleration riders,” which allow you to access your death benefit early if you have an illness that’s likely to last the rest of your life. Unlike true long-term-care coverage, these products won’t cover temporary conditions.
Ask your financial adviser to compare multiple long-term-care coverage options, says Jesse Slome, executive director of the long-term-care association. For hybrid products, he says, be sure to request and read the life insurance policy illustration, which outlines policy premiums, death benefits, cash values and other details.
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Erin O’Donnell is a freelance health and science writer, parent, and graduate of Northwestern’s Medill School of Journalism. Walks by Lake Michigan make her happy.