What is Hybrid Long Term Care Insurance?
Life insurance is designed to provide a death benefit for your loved ones in the event of your death. Long-term care insurance, meanwhile, can help you pay for long-term care expenses while you’re still alive. Having both types of insurance coverage could make your financial plan more comprehensive, but it can get expensive. Purchasing a hybrid life insurance policy can allow you to meet both needs without doubling the cost. A financial advisor can assess your insurance needs and help you plan for the future.
What is Hybrid Long Term Care Insurance?
Hybrid long-term care insurance or hybrid life insurance is an insurance product that combines two types of coverage into one policy. When you buy hybrid life insurance, you get both life insurance and long-term care insurance. This type of coverage can also be referred to as a linked benefit policy as you get two benefits in one.
The life insurance portion of a hybrid policy pays a death benefit to the individual or individuals named as the beneficiary when you die. The long-term care party pays benefits over your lifetime to cover the costs of long-term care.
Hybrid policies essentially allow you to get the best of both worlds since you don’t have to purchase life insurance and long-term care insurance separately. For this reason, it can be an attractive option for financial and estate planning, as long-term care coverage can help you avoid having to pull resources to pay for care later.
How does hybrid long-term care insurance work?
What is Hybrid Long Term Care Insurance?
Hybrid long-term care insurance assumes that you may need long-term care at some point. The long-term care portion of the policy will pay out money to cover those costs when the time comes. For example, you could use policy funds to pay for a private or semi-private room in a nursing home if your health deteriorates and you need around-the-clock care.
The long-term care portion of the policy typically pays benefits over a certain amount of time, up to a certain amount. Therefore, your policy could pay out $5,000 a month in long-term care costs for up to 24 months. The maximum long-term care benefit would be $120,000.
If you need long-term care, you will be able to collect these benefits from your policy to cover your medical bills. Once those benefits have run out, you won’t be able to withdraw anything else from the long-term care portion of the policy. Any long-term care allowance used would be deducted from your death benefit.
Going back to the above example, if the policy had a total death benefit of $500,000, your beneficiaries would be eligible to collect $380,000 if you hit your maximum long-term care benefits. Hybrid policies may pay a minimal benefit, typically between $15,000 and $25,000, in situations where long-term care benefits exhaust the death benefit.
Who should consider a hybrid insurance policy?
Hybrid life insurance can make sense for anyone looking to have life insurance coverage while also creating financial protection against the high costs of long-term care. A two-year stay in a nursing home could easily cost hundreds of thousands of dollars, depending on the level of care required and the facility chosen.
You may use your existing assets to pay for long-term care, but that may not be ideal if you hope to create a legacy of wealth to be passed on to your heirs. Worst-case scenario, you may be forced to sell your home and other assets to find the money to pay for long-term care for yourself or your spouse if you’re married.
Medicare doesn’t pay for long-term care in a nursing home, although Medicaid does. There is, however, a catch. To qualify for Medicaid long-term care assistance, you must meet income and asset eligibility requirements. Again, you may have to spend some of your assets to qualify for Medicaid.
Creating a Medicaid Asset Protection Fund is an alternative. This can be expensive, however, and you need to make sure it’s done correctly to avoid putting your Medicaid eligibility at risk. A financial advisor or estate planning attorney can offer guidance on how to create a Medicaid trust and when it makes sense to do so.
Pros and cons of hybrid long-term care insurance
What is Hybrid Long Term Care Insurance?
Hybrid life insurance may be more suitable for some people than others. Comparing the pros and cons can help you decide if it makes sense for your situation.
Here are some of the key pros to know:
Stable premiums. Hybrid policies can offer guaranteed premiums, so you don’t have to worry about them getting more expensive over time. This is a plus if you’re looking for coverage that fits your budget now and for years to come.
Premium flexibility. Depending on the insurer, you may be able to pay a hybrid policy in installments or in a lump sum. You may prefer to have more of an option to pay for your coverage if you’re trying to plan ahead.
Potential accumulation of cash value. If a hybrid life insurance policy combines permanent life insurance with long-term care coverage, you can benefit from the accumulation of cash value. Permanent life insurance can create cash value as you pay premiums, which you can then withdraw or borrow as needed.
Cost. Hybrid policies can be less expensive than buying life insurance and long-term care insurance separately. Comparing rates and obtaining life insurance quotes can help you estimate what you might pay.
Now, here are some of the downsides to hybrid long-term care insurance coverage:
Waiting periods. Life insurance policies may have waiting periods that you must observe before any benefits can be paid. Typically, it’s two years, but hybrid policies may require you to wait longer before you can use your long-term care benefits.
Reduced death benefit. As mentioned, using the policy’s long-term care benefits can reduce the death benefit paid to beneficiaries. They may still be able to receive a minimal benefit after your death, but it could be much less than the original face value of the policy.
Inflation risk. Inflation can make long-term care more expensive, which can be difficult if your hybrid policy doesn’t offer built-in protection against rising consumer prices. If so, your long-term care benefits wouldn’t go that far in covering your care.
How to buy hybrid insurance
If you’re interested in getting a hybrid policy, it’s important to shop around and compare your options. In particular, consider:
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How much will you pay in prizes
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Levels of coverage for both death benefit and long-term care benefit
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Maximum payments for long-term care benefits
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Premium payment options (e.g. lump sum or installments)
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How long-term benefits are paid and to whom they can be paid
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Whether the policy creates cash value
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What minimum death benefit is available if long-term care benefits deplete the policy
You can also compare the rates for life insurance and long-term care insurance separately to get an idea of how much you might pay for each. This can give you an idea of how much you could save with a hybrid policy.
Keep in mind that the younger and healthier you are, the more affordable life insurance is likely to be. In addition to health and age, gender, family history, occupation and hobbies can also influence what you may pay for life insurance and hybrid insurance. Keep in mind that you may need to complete a medical exam to get coverage.
The bottom line
Hybrid long-term care insurance can kill two birds with one stone, so to speak, by protecting your life and covering long-term care costs. The fact that the coverage is not use it or lose it adds to the attractiveness of this type of insurance. While there are many options to choose from, the best hybrid policy for you is one that offers the level of coverage you need at a cost you can afford.
Insurance planning tips
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Consider talking to your financial advisor about whether hybrid life insurance is something you may need. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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A long-term care annuity is another way to fund long-term care needs. Annuities are contracts that allow you to pay premiums to an insurance company, then get your payments back starting at a later date. You could use annuity payments to pay for long-term care for yourself or a spouse, or simply provide a guaranteed income for retirement. There are pros and cons to keep in mind, so it may be worth talking to your advisor about whether an annuity is something to consider.
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