Worried About Long-Term Care Costs? Hybrid Life Insurance Policies Can Help

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Worried about how you'll pay for an extended stay in a nursing home, in-home medical care or other long-term medical costs as you get older? You might turn to your life insurance policy for a solution.

It's no secret that the cost of long-term medical care can be exorbitant. You might get financial relief, though, from what is known as a hybrid life insurance policy, a type of insurance that combines the traditional death benefit payout of life insurance with long-term care coverage.

A hybrid policy could provide you peace of mind, especially if you worry that you will need long-term care as you age. There are drawbacks, though: A hybrid policy isn't cheap. You'll pay more for that extra benefit of long-term care.

Is a hybrid policy the right choice for you? That depends on how long you expect to live, whether you can qualify for traditional long-term care insurance and how healthy you are.

How hybrid policies work

At their most basic, hybrid policies attach a long-term care rider to either a whole life or universal life insurance policy.

If you then need to pay for long-term medical care that you otherwise couldn't afford, you take out what amounts to a tax-free advance on your life insurance death benefit, using these funds to pay for long-term care. Usually, you'll receive these payments on a monthly basis, enough so that you can pay for your care.

You'll receive these payouts until you exhaust your long-term care benefit, though some policies allow you to pay extra to extend that payout period. You'll also still receive at least a portion of your traditional death benefit from your life insurance policy, whatever your long-term care payments doesn't eat up.

Michelle Moreno, an insurance agent with World Group Financial in Houston, said that combining long-term coverage with life insurance could save policyholders a significant amount of money. That’s because long-term medical expenses are so expensive.

Moreno says that long-term care could cost you $3,000 to $9,000 a month, depending on where you live. If you need care in a nursing home, that could cost $82,000 to $95,000 a year, she said.

A life insurance policy with a long-term care rider attached could help cover these costs. Moreno gives this example: Say you have a universal life insurance policy of $500,000 with a long-term care rider. The policy might state that you can use up to 80 percent of the policy's value for long-term care. This means you'd be able to use $400,000 to cover long-term care.

If you use this amount, your life insurance policy would pay out $100,000 when you die, the original $500,000 payout amount minus the money you spent on long-term care.

Extra cost for long-term care rider

Does a long-term care rider make sense for you? That depends on several variables, Moreno said.

"You need to take into consideration personal risk factors such as life expectancy, gender, your family situation and health history," Moreno said. "Financial considerations also need to be looked at: income changes, retirement, what your assets are now or what they will be in 10 to 20 years."

You will pay more for a hybrid life insurance policy than you will for traditional life insurance coverage. How much more depends on such factors as your age and overall health. You might also run out of coverage depending on how long you need long-term medical care. If your policy gives you the option to extend this coverage, that, too, will come with a hefty price tag.

Cliff Caplan, wealth manager with Norwood, Massachusetts-based Neponset Valley Financial Partners, said he has long recommended long-term care insurance for his clients. This product, though, has become both more expensive and difficult for clients to get, Caplan said. It’s why he sometimes sees people explore hybrid life insurance policies: They can’t qualify for a traditional long-term care policy.

Caplan said that insurance providers had long underpriced long-term care insurance. Because of that, rates for this coverage have continually increased in recent years. At the same time, many of the industry's top carriers, companies such as John Hancock, MetLife and Prudential, have left the long-term care insurance business, Caplan said, reducing the options for consumers who want to invest in this protection.

Those that remain are stricter on who they will approve for policies, Caplan said.

"The underwriting on these policies has become stringent, resulting in declines of coverage for seemingly minor medical issues," Caplan said. "Essentially, these remaining companies want only the creme-de-la-creme."

Hybrid policies cheaper than other insurance alternatives

Hybrid products are a way to combat the rising premiums of long-term care insurance, Caplan said, as while they are more expensive than traditional life insurance, they are usually less expensive than the long-term care insurance options now available.

Hybrid products also ease the worries of many that they'll invest in long-term care insurance but never use the coverage.

Hybrid policies provide long-term coverage if needed. But they also provide an income-tax-free death benefit if policyholders die without ever tapping the long-term care benefits, Caplan said. And that death benefit will be larger if policyholders don’t use the long-term care coverage portion of their policies.

Kathryn Casna, an insurance specialist with Salt Lake City-based TermLife2Go.com, said hybrid policies are a good option for people who want long-term care protection but worry that their rates will increase or they'll waste money on premiums if they never need long-term care.

"Adding a long-term care rider to a life insurance policy allows the owner to maintain a consistent premium," Casna said. "And if they never use the long-term insurance portion of their benefits, their beneficiaries will still get the full death benefit."

There is a downside to a hybrid policy, though. If you do need long-term care, most policies will pull the money you need from your death benefit first, Casna said. This could leave you with less money to pass on to your dependents after you die.

"If keeping your entire death benefit is important to you, a hybrid policy might not be the way to go," Casna said. "If it's more important to keep your premiums low as you age, however, a hybrid policy could be the best option."