Minnesota Hybrid Long-Term Care Insurance

Many people are concerned about needing long-term care (LTC) and being unable to pay for it. Their concern is justified.

According to 2018 statistics, 69% of those turning 65 this year will need long-term care at some point. We are all trying to determine the best way to protect ourselves and our families from the financial hardships of long-term care.

Often, people turn to long-term insurance, which means that you pay an annual premium and if you need care, the policy pays a benefit. Traditional long-term care insurance covers services when the insured person meets specific disability criteria.

Of the population aged 65 and older, not in an institution, 10.2% have private LTC insurance.

The catch is, if you die without ever needing long-term care, you may feel the money you spend on the insurance is wasted.

Consequently, more and more people are turning to hybrid life and long-term care policies. But before making this important decision, it helps to understand the policies and weigh the pros and cons of a hybrid policy for you.

What is a hybrid LTC policy?

Life insurance/long-term care hybrid policies combine permanent life insurance with an accelerated death benefit rider that pays long-term care benefits. A hybrid LTC policy uses a universal or whole life insurance policy as a base and adds a long-term care rider. Most of these offer a single premium approach.

The hybrid LTC policy works like this: if and when the policyholder needs long-term care, he or she would withdraw funds from the policy.

When that runs out, the insurance company pays for care. If the policyholder dies without ever needing long-term care, the heirs receive a death benefit. In some cases, the policy pays for long-term services with a corresponding reduction in the death benefit paid out to heirs.

Advantages of the hybrid long-term care policy

A hybrid life insurance with long-term care policy comes with many advantages.

• There are some psychological advantages to hybrids. Although insurance for long-term care covers expenses similar to health expenses, a policyholder may not need the benefits of a long-term care policy for many years. Perhaps never.
• This may lead the policyholder to adopt a "use it or lose it" attitude, feeling that he lost or wasted all that money on premiums. With a hybrid policy, however, it is comforting to know that there will be positive returns on the premiums in either long-term care benefits, a death benefit, or both. The premiums paid are not lost but will be at least partially paid out to your heirs.
• Hybrid policies offer tax-free reimbursements for qualified long-term care expenses.
• If the long-term care benefits are not fully used, they provide tax-free death benefits to your heirs.
• There is preferential tax treatment if you repurpose existing life insurance and annuity  policies.
• There is a potential return of your premium if you change your mind at a later date.
• Benefits are guaranteed, provided you pay your premiums. Premium rates are locked in, so there is no danger of rate increases in the future.
• If you prefer to pay family members, or other non-licensed, informal caregivers with your benefits, some hybrid plans offer cash indemnity benefits. These are no longer available for new, traditional LTC policies.

Disadvantages of the hybrid long-term care policy

There are a few hybrid life insurance disadvantages that you should know about.

• LTC payouts reduce your life insurance policy's cash value and/or death benefit, which may result in leaving little or no death benefit to your heirs if you need long-term care for an extended period of time. Therefore, if you need a guaranteed specific death benefit, you may wish to consider an additional life insurance policy.
• The premiums you pay for hybrid policies may not be tax-deductible. You should discuss the tax implications with your tax preparer.
• Long-term care riders usually require that premiums be paid over a shorter period of time than traditional long-term care. This may be a financial disadvantage for some people. However, some newer products are offering flexible premium payment options.
• Cash value growth or death benefits may be less than in other insurance policies.

Other factors to consider with hybrid long-term care and life insurance policies

Long-term care policies are constantly evolving and there are many types available. It is important to fully understand the plan's features, riders, and premiums as well as how the policy works for your individual situation. When choosing a policy, or deciding if hybrid long-term care insurance is worth it, factors to consider include:

Eligibility requirements for long-term care

These requirements are generally the same as those used for standard LTC insurance policies. Simply put, a licensed health care practitioner must certify the insured meets the requirements for long-term care as set forth in the policy.

Most require certification that the insured has a severe cognitive impairment or cannot perform at least two of six activities of a daily living period of at least 90 calendar days or more. The insured party must submit a plan of care, which has to be recertified annually.

The requirements are the same for a chronic illness, except for a permanent condition, in which there is no potential for recovery.

Benefit amounts

The insured can choose to receive the benefit monthly or an acceleration percentage (generally 2 - 4 percent) of the life insurance policy's face value. Benefit payment options are determined when the policy is issued.

Reimbursement benefit vs. cash indemnity benefit

This factor should be carefully considered. For a "reimbursement" benefit, the insured must submit proof of actual expenses before the benefit payment is made.

For a "cash indemnity" benefit, there is no requirement that the insured submits bills and receipts.

The insurance company pays the full monthly LTC benefit. Cash indemnity plans are usually more expensive, but also more flexible.

The insured may be able to pay family members as caregivers or pay other expenses not permitted under a reimbursement plan.

Taxation of benefits

Benefits are typically tax-free up to the greater of the per diem rate (as set forth in the Health Insurance Portability and Accountability Act, or the actual qualified long-term care expenses

Return of premium

What if you want to surrender the policy after premiums have been paid? Some LTC riders provide for this.

Residual death benefit

If provided in the policy terms, some policies will pay a death benefit, even if the death benefit was paid towards long-term care.

Inflation protection rider

You may wish to consider an annual inflation rider, which can usually be purchased for an additional cost.

After considering the hybrid long-term care insurance pros and cons, discuss your individual and family needs with your financial advisor and insurance professional. For more information, contact us.