Hybrid Long-Term Care Insurance

A hybrid long-term care insurance product, sometimes called a linked benefit product, incorporates the benefits of a traditional long-term care policy with those of a permanent life insurance product.

Traditional long-term care insurance operates much like a car or home policy: you pay a premium to the insurer and, in exchange, the insurer pays up to policy limits should any long-term care needs arise. But if you never end up needing long-term care with a traditional product, you won’t get any part of your premium back.

The hybrid model offers a solution to one of the main criticisms of traditional long-term care insurance: its “use it or lose it” nature. A hybrid product will pay for long-term care needs that arise, but will also pay a death benefit to a beneficiary if the policyholder passes away without requiring long-term care.

With a hybrid policy, you’re guaranteed to get a benefit out of your premiums, whether it’s as long-term care coverage or as a death benefit for your beneficiaries. This can provide policyholders with peace of mind knowing that their money won’t be lost if they never need the long-term care benefit.

Hybrid long-term care insurance typically covers a range of long-term care services, similar to traditional long-term care insurance.

As with other insurance products, the cost of hybrid long-term care insurance varies depending on factors like your age, health and the amount of coverage you choose.

Hybrid long-term care insurance policies are, on average, more expensive upfront than traditional long-term care or standalone life insurance products. You’ll have to weigh this cost with the return on investment hybrid policies offer through the life insurance component​.

Insurance companies may offer special rates or discounts on their policies, and hybrid long-term care policies are no exception. These special rates can make these policies more affordable and attractive to potential policyholders.

Remember, special rates can vary between insurance companies and individual policies, so it’s important to shop around and compare options.

Benefit payments — whether they’re long-term care or life insurance payouts — are typically not taxable to the policyholder or beneficiary. And, depending on your individual circumstances and the specifics of the policy, you may be able to deduct the premiums of your hybrid policy on your federal income tax return.

According to the IRS, deductible medical expenses may include premiums paid that cover medical care for a qualified long-term care insurance policy. These rules may change if they are employer-sponsored premiums or if you are a Federal employee. Limits may also apply to self-employed individuals.

Consult a trusted tax advisor, as small details can change the circumstances of your particular situation.

There are several types of hybrid life insurance products available. Each option has its own set of features and benefits.

Linked benefit life insurance is, in effect, another term for hybrid long-term care insurance. “Linked benefit” refers to the combination of a traditional long-term care product with a life insurance policy attached.

If benefits are triggered, the death benefit is usually exhausted first. After that, the insurer pays either reimbursement or indemnity benefits throughout the benefit period — though OneAmerica has a product with benefits that continue without a defined period.

Buying a long-term care (LTC) rider on a traditional life insurance policy is also an option, though coverage is not as comprehensive as it would be with a linked benefit policy. This may be a more affordable option if a hybrid product is out of your budget.

These are typically structured as whole life policies. An LTC rider would come, most likely, as a percentage of the death benefit or as an accelerated death benefit.

For example, let’s assume a whole life policy with a $250,000 death benefit has a 2% LTC rider built in. The LTC rider would be triggered if the policyholder cannot perform two out of six activities of daily living (ADLs). Once triggered, a $5,000 monthly benefit would be paid to the policyholder up to the $250,000 maximum.

Then, in the event of the death of the policyholder, those monthly payments are deducted from the death benefit, and the remainder is paid to the beneficiary.

Most of these policies carry a 90-day elimination period.

Chronic illness or critical illness riders on life insurance policies are a form of living benefits. These can be similar to long-term care products, but they are not long-term care insurance. Also, a broker or agent will not need a health insurance license to offer these.

These riders are catered toward conditions that are not immediately terminal to allow for the acceleration of death benefits to the insured.

Most of these policies carry a 90-day elimination period, though some will have no elimination period.

A main pro of hybrid products is that you have the advantage of both life and long-term care benefits. If you don’t use all of your life insurance bucket, there will still be some left in the event of death.

Plus, your premiums are generally locked in and cannot be increased. A drawback to the traditional side is that premiums are not locked in or guaranteed. The rates can go up each year, which may not make sense for a large demographic of seniors who are living on a fixed income.

Another benefit of choosing a hybrid product is asset protection. With a hybrid policy, you’ll have a greater likelihood of salvaging your personal funds. You’ll also ensure a higher probability of leaving a legacy for your heirs. Professionally speaking, leaving a legacy and decreasing the burden of care for family are the two most common reasons for considering such policies.

There are also some negative points to hybrid products, the most obvious among them being the higher upfront costs. But they may also offer less customization in some aspects than traditional long-term care policies. Traditional policies, for example, offer more flexibility when choosing the time you’ll have to wait to receive benefits, also called the elimination period.

Hybrid long-term care insurance may be right for you if you are concerned with paying for benefits you may not use or pass on to heirs. If you have assets that can fund such a policy, it may be a smart decision for your financial future. These are unique policies, which offer a rare option to combine two types of insurance policies for your benefit.

Traditional long-term care insurance does not have any combined insurance benefits that include life insurance. That being said, premiums are more affordable.

Be sure to start your research as soon as possible. As time goes on, you’re more likely to develop ailments that may disqualify you or your loved ones from coverage.

Your research should include the financial strength of the carriers you are comparing. A high financial strength rating will increase the likelihood of benefits being paid as promised. While there are many rating companies and websites to do this research, AM Best is looked upon highly.