Up until a few years ago, consumers had few choices when it came to long term care insurance (LTCi).
Traditional policies that provided a certain amount monetary reimbursement were the norm. Policies could be designed to cover expenses for a few months or much longer period of time – even providing benefits for the insured’s lifetime.
For example, consumers could purchase coverage that would provide $100 a day in benefits for a period of three years. When calculated, the $100 daily benefit multiplied by 365 days in a year for 3 years would create a $109,500 “pool of money” available for care.
This pool of money would pay for care in a nursing home, assisted living facility, adult day care, or in the personal residence of the policyholder once certain criteria had been met. In some cases, these funds could be used to reimburse care provided by a family member.
When the pool of money was depleted, the traditional policy would provide no more benefits. If the policy was never used however, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.
With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in most major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, funds, or ability to provide around the clock care to a loved one.
The insurance industry realized that consumer needs were not always being met with long term care policies. While traditional policies were satisfactory for some, many seniors wanted more guarantees in the event their policy was never used.
Thus, these traditional policies added a “return of premium” rider. If the policy was not used over a set period of time, say 10 years, then the insurance company would return a portion (if not all) of the premiums to the policy owner or a family member. This, like any other rider, came at an additional expense to the purchaser.
In response to customer and agent demand, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance policy with a traditional long term care contract.
With hybrid policies, the consumer has the guarantee of long term care benefits, but if no care is needed, the contracts all offer the promise of monetary benefits to the insured and his or her beneficiaries.
Hybrid life policies come on a few different shapes and sizes. One policy links long term care to a single premium life insurance policy. With this plan, the insured deposits a desired one-time premium into a policy. Depending on the age, gender and health of the client, an immediate pool of money is created for long term care. At the same time, an immediate death benefit is created by the life insurance contract.
Take, for example, a healthy 65 year old non-smoking woman with $175,000 in liquid assets. If she deposits $50,000 into the single premium hybrid life account, approximately $87,000 in long term care benefits would be created immediately. There would also be a death benefit to her beneficiaries of approximately $87,000 created from the life insurance component of this account.
At an additional on time cost, this same woman can select a benefit rider that would provide approximately $260,000 in long term care benefits as oppose to the original $87,000. She would also have access to her original $50,000 investment should the funds be needed elsewhere.
In this example, she receives guarantees on her investment as well as protection from the high costs associated with a nursing home stay. In addition, she would still have $125,000 in assets at her disposal that could be used for a traditional or long term care annuity.
There are several types of hybrid life plans; this is but one example. Some allow for joint ownership while others must be purchased individually. Working with an independent agency like ours, consumers can compare several variations of these linked products.
Another example of combination type plans links long term care benefits to a single premium deferred annuity. This product begins as an annuity with either a lump sum single premium deposit. If no care is needed, the annuity gains interest like any other fixed annuity and is available for the insured’s financial needs.
However, if the owner/annuitant needs care in a nursing home or elsewhere, a formula will be used to determine the monthly benefit amount available. Continuing on the example used earlier, a healthy 65 year old woman who deposited $150,000 into this account would have the advantages of tax-deferred, safe and insured growth in the annuity and approximately $4,700 a month in long term care benefits for 36 months.
At an additional one-time cost, a benefit rider can be added to the policy providing a $4,700 monthly benefit for her lifetime. Concerning these types of policies, the additional benefit rider is usually a wise purchase in order to obtain maximum guarantees.
The newest addition to the hybrid marketplace is another variation of the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy.
There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.
The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.
The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less than the $50,000 benefit is needed each year. Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.
These scenarios are only basic examples of how hybrid policies work. The coverage will be different from person to person depending on age, health, gender, premiums and benefits requested. In order to get an accurate proposal, an illustration would be required. We can help you compare illustrations from several carriers.
These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses while still providing living benefits to themselves and a legacy to their heirs
We offer traditional long term care coverage from Allianz Life, Genworth, John Hancock, Lincoln Financial Group, Mass Mutual, Mutual Of Omaha, Prudential, and others.
We work with American Equity, Genworth, Old Mutual, One America, Money Guard, and Mutual of Omaha to provide hybrid long term care policies.
Category: Articles, Long Term Care, Retirement Planning, Wealth TransferLast updated on January 17th, 2017