When the time comes to choose an insurance policy that will give you peace of mind in the last years of life, many people must answer an important question: should I purchase a life insurance or long-term care policy? If you don’t have the money to purchase both, it’s a good idea to acquire a combined life and long-term care policy. It’s a very attractive option because it offers the best of the two products in just one.
In this article we will explain what a hybrid life and long-term care policy is. Read below to find out why it’s an option that might be a good choice to provide broad coverage at competitive prices.
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What is a Hybrid Life and Long-Term Care Policy?
According to information from the 2018 Insurance Barometer Study, which is prepared by the organizations Life Happens and LIMRA, almost a third of Americans state that long-term care is one of their top financial concerns. Long-term care includes medical attention, in-home nursing care and conventional domestic help (professionals who provide care and accompany an individual during the last years of their life).
A frequent option to cover these types of expenses is long-term care insurance, known by its acronym LTCi. These policies were traditionally used to cover these types of care. However, in recent years these types of products have become less popular because of their high cost and because it is a policy you pay for and might never need to use because you might pass away before using it, or because the services and benefits it offers might not be necessary. This is why a new type of hybrid policy, which combines life insurance and long-term care insurance, has become more common.
As you know, life insurance is a product designed to guarantee the economic situation of your loved ones if you are not around. There are two main types of life insurance: temporary and permanent. In both cases beneficiaries receive a benefit when the insured passes away, who only receives money if they take withdraw this from the cash value of a permanent policy (this component doesn’t exist for temporary policies).
As such, life insurance isn’t a product designed to improve the living conditions of the insured, but rather that of their successors and beneficiaries. On the other hand, long-term care insurance has the purpose of granting more peace of mind for the insured in their last years of life. Combining these two types of insurance is a great idea because it allows you to not only have life insurance to protect your loved ones, but also have long-term care services in the event you need them.
In summary, these products take on the form of life insurance that includes a clause for long-term care. Let’s have a look at how it works.
How Does Combined Insurance Work?
Hybrid insurance is a relatively simple product to understand and use. The basis of the plan is a life insurance policy, which is generally permanent, either an ordinary life or traditional plan, or a universal permanent one.
This policy is the foundation of this product, to which a long-term care or LTCi clause will be added. Although you can pay monthly premiums, these types of insurance are usually purchased in a lump sum payment, or with a few high annual premium payments. The median price for this type of combined product is $75,000, amount that gives you access to significant benefits.
The long-term care clause usually establishes a maximum coverage amount, which is usually several times the premium amount. This means that if the combined insurance premium is $75,000, you can obtain coverage of, for example, 4.5 times the cost of this or $337,500. This amount of money should be enough to allow you to cover the costs of specialized in-home care.
What Happens With the Death Benefit? As you use up the money allocated to long-term care costs, the death benefit decreases. On the other hand, if you don’t use the long-term care clause, all the money will be given to your beneficiaries. To ensure that your loved ones will always receive something, there are combined policies that stipulate a fixed minimum to be allocated to the death benefit. This might be, for example, 10% of the total available amount.
The underwriting process to obtain a hybrid policy is fairly straightforward. In some cases, you are required to undergo medical exams and interviews, while some insurance companies have simplified underwriting processes, and you might just have to answer some questions over the phone. As is standard insurance industry practice, the healthier the person purchasing the plan is, the lower the premium will be, making it easier for you to be granted the policy.
In addition, some policies include the option of waiving the hybrid insurance after a few years, for example, after five years. If you haven’t used the long-term care clause by this time and the money is intact, the insurance company will return the entire amount and cancel the policy. This is an attractive option for people who believe they have enough resources to cover in-home care and prefer to use their money on other types of insurance, such as a normal life insurance policy.
Advantages and Disadvantages of Purchasing Hybrid Insurance
As we’ve seen, a hybrid policy is an attractive option in terms of practicality. It offers peace of mind because it allows you to enter into the last stage of life with extra protection, and if you don’t need it, it guarantees a good benefit for your beneficiaries.
They also offer several additional benefits. Let’s have a look at the main ones:
- Price. Although the premiums for combined insurance are high, they are still attractive when you consider what each policy (life insurance and long-term care) would cost, especially if you take into consideration that you might never even use the latter.
- Good investment. For many people an insurance policy of this type is a smart way to invest their money and reap extra profit in the form of peace of mind.
- Stable premiums. When you pay the premium in a lump sum, or a few payments, you are guaranteed that the price will never change and avoid future increases in the cost of the insurance, which is common for long-term care policies.
- Simplicity. Having a single policy makes it easier to manage, reduces paperwork and eliminates bureaucracy. It allows you to have a single policy for services that would usually require two.
These advantages make the policy even more attractive. However, it’s also a good idea to consider some of the disadvantages of hybrid policies:
- Reduced death benefit. Possibly the main disadvantage is that, if you use the in-home care clause, the money destined to your life insurance beneficiaries decreases.
- Annuities. In cases where the insurance is paid annually, you have to consider how this will affect your monthly income, as a part of this will have to be destined to long-term care.
- Is it enough money? You also have to keep in mind that a hybrid policy has a maximum amount of money that can be used for in-home care. It’s important to decide if this will be enough to cover the cost of care you may need.
- Don’t forget about inflation. Related to the previous point, it’s also important to contemplate inflation and the increasing costs of services. Long-term care costs will not be the same when you purchase the policy as when the clause offering these services goes into effect.
- High cost. Clearly, not everyone has such a large amount of money ($75,000 on average) on hand to purchase a plan like this. As such, it’s important to think carefully about acquiring one.
In summary, this is an attractive yet complex product. It’s a good idea to talk with a specialized insurance agent before purchasing and make sure you read the fine print of the policy in order to properly understand all the details. Once you’ve considered all this, a combined or hybrid life and long-term care policy is an interesting option. It provides the best of both worlds and allows you to face old age with peace of mind.