Hybrid products provide answers to the two most common objections to stand-alone or traditional long-term care insurance . . . the risk of future increases in premiums, and the “use it or lose it” concern (pay premiums over the years and pass away without needing long-term care.)
Hybrid policy premiums are fixed, and the provision for a death benefit means that someone will be paid, the insured on a long-term care claim, or the insured’s beneficiary in the event of death.
“Hybrid” typically refers to a universal life or a whole life product with a long-term care rider that allows the insured to accelerate a percentage of the death benefit to pay for long-term care needs. For example, a hybrid policy may provide for a $250,000 death benefit with a 2% withdrawal rate against that death benefit for long-term care at $5,000 a month for 50 months. The policy will likely have a minimal “residual” death benefit (e.g., $10,000) payable at death should the insured have exhausted the basic death benefit on a long-term care claim.
If you are considering a hybrid universal life policy, be sure that it includes a no-lapse premium guarantee for a substantial or lifetime period. Such a guarantee is not available in stand-alone traditional LTC policies.
An “asset-based” product usually refers to a single premium life policy with an LTC benefit, or to a non-qualified tax deferred single premium annuity with an LTC rider. Such policies may also provide for premium payments over a limited number of years.
If you are at least 59 ½ at the time of purchase, you may, depending on the carrier and product, be able to utilize retirement funds without an IRS 10% penalty.
Cash value from an existing universal life or whole life policy may be used in a tax-free Section 1035 Exchange to fully or partially fund a single premium hybrid policy.
If you have a non-qualified annuity (one that isn’t part of your IRA or pension plan) with a lot of cash build up beyond what you have paid into the annuity, you might consider a single premium LTC policy using the value of the annuity on a tax-free exchange basis. That’s a new option available since 2010. It’s worth looking into if you need LTCI and don’t foresee a need for the annuity in retirement. You’ll avoid federal income tax on the value of the annuity that’s in excess of the cash you put into it.
The additional cost of an LTC benefit itself in hybrid and asset-based contracts is typically much less than would be the average premium for a stand-alone traditional LTC policy. However, there are trade-offs. The total cost of a hybrid policy may be much more substantial than a traditional LTC policy because of the cost of life insurance benefit and a single pay or limited number of payment years.
Hybrid and asset-based policies do not offer the optional benefits available with traditional LTC policies such as shared care, inflation riders, restoration of benefits, dual waiver of premium, a survivorship benefit, or waiver of the elimination period for home health care.
As always, it comes down to carefully considering your needs, resources, and future concerns. And we recommend that you do so in conjunction with your financial advisor, accountant, and an elder law attorney. Creative solutions to long-term care planning involve financial, insurance, tax and legal considerations. You need to get it right. Be sure to touch all the bases!
Wealthy individuals can absorb an error in projecting the future cost of care, how long the need for care might last, or the need for long-term care arising sooner rather than later.
However, consider how much money you’d need to have to pay out just $60,000 annually (the $5,000 a month example we’ve used in our discussions x12) for 3 years without reducing your principal. That number is $4,500,000 assuming a 4% after-tax withdrawal rate ($180,000/4%).
The cost of a 3 year benefit period traditional LTC policy (a $180,000 pool of money) could be about $2,500 a year, assuming you’re 60, in good health, have a 3% compound inflation rider, shared care, a 90 day deductible, and spousal waiver of premium.
And remember that, with shared care, your benefit pool could be $360,000 over 6 years on claim. To self-insure for that amount, you would need $9,000,000 earning 4% net per year.
To pay out a premium of $2,500 annually, assuming you earn 4% net on the invested sum, you would need to set aside $62,500.
Which is the better use of your money?
We invite you to allow us to discuss these very different alternatives with you, as well as to consider whether, in your circumstances, you may be better advised not to purchase insurance, or to self-insure against the risk of needing long-term care.
Our interest is in serving your best interest, not in simply selling a product. Please call or text us at 412-977-0601 or email your contact information to firstname.lastname@example.org.