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How Hybrid Life Insurance Can Also Pay for Long-Term Care

Learn how hybrid life insurance works when it also provides long-term care coverage in additional a standard life insurance policy benefit.

As you plan for your financial future, you may have come across some scary numbers. 

It’s been frequently reported that medical costs could easily add up to multiple hundreds of thousands of dollars during your retirement years.

The reality is:

One of the largest potential medical costs you could face is long-term care. Paying for medical care in a skilled nursing facility can get expensive.

Some life insurance policies can pay for long-term care costs or, if you don’t use them, provide a life insurance death benefit.

Here’s what you need to know about why these policies exist, why you may want one and how they work.

Costs of Long-Term Care

Staying in a skilled nursing facility easily costs thousands of dollars each month. Specialized care can cost even more.

According to LongTermCare.gov, a private room in a nursing home costs $7,698 per month based on national averages. Opting for a semi-private room only drops that cost to $6,844 per month.

To make matters worse, these are 2016 costs. Prices have likely increased since then.

Even those that have prepared diligently for retirement may not be able to absorb these costs. They can add up quickly once you enter a long-term care facility.

Instead, people may consider spreading these costs out over time.

Some people do this through long-term care insurance. Others use a hybrid life insurance policy.

Why Long-Term Care Insurance Exists

People often hope Medicare covers these long-term care costs once they reach retirement age.

Unfortunately, that’s not how it works.

You may be able to get Medicaid to pay for long-term care costs. To do this, you have to exhaust virtually all of your assets before you qualify. 

That means:

You have to use your entire retirement savings to pay for expenses initially incurred. You may qualify for Medicaid after you’ve exhausted your hard-earned retirement nest egg.

Long-term care insurance is one way to insure against the costs of a possible long-term care stay in retirement.

If you buy a policy early enough in life, the premiums can be somewhat affordable.

They’re still very expensive.

Long-term care insurance usually covers you up to a maximum amount stated in your policy.

There are significant problems with long-term care insurance.

Premiums were initially designed to stay flat throughout your life. This way, policyholders could budget for them. 

Unfortunately, rates have risen in some cases as costs continue to increase dramatically.

When you don't use the benefit

Another problem presents itself if you don’t use the benefits you pay for.

Even though many people end up facing a stay in a long-term care skilled nursing facility, not all people do. If you don’t end up using the benefit, you often get nothing.

This can result in a substantial financial loss.

In this case, you could have spent the money elsewhere or passed the money down to your children.

As a result, life insurance companies have come up with an alternative insurance solution.

What Is Hybrid Life Insurance?

Hybrid life insurance combines life insurance with long-term care insurance. It was designed so you can avoid a situation where you buy long-term care insurance and don’t use it.

On the face, it works in a relatively straightforward way. The details can get complicated.

In reality, there are several types of hybrid life insurance products. 

If you’re considering one of these products, consult with a fiduciary financial advisor

These professionals can give you an unbiased opinion of whether the policies are the best option for you. This is because they aren’t influenced by the commissions of selling one of these policies. 

Instead, you have to pay them for their advice. It could be well worth it. If you avoid purchasing a pricey policy that doesn’t fit your needs, you could save a huge amount of money.

How it works

These kinds of life insurance generally work as a long-term care insurance policy and a life insurance policy combined. 

To buy a policy, you normally make a single lump-sum payment.

Another option is making many large yearly payments.

In return, you get both life insurance and long-term care coverage.

The long-term care coverage usually covers eligible expenses in an amount that is several times the policy’s cost.

The death benefits typically aren’t as generous if you don’t use the long-term care portion of the policy. 

In fact:

You’d be lucky to get the inflation-adjusted value of your initial payment in return. It’s entirely possible the death benefit could be worth less than the amount you paid in on an inflation-adjusted basis.

The life insurance policy part is a permanent life insurance policy. Permanent life insurance is more expensive than a traditional term life insurance policy. 

That, along with the cost of insuring your long-term care costs, explains the relatively low death benefit.

Even so, permanent life insurance stays in effect your whole life. Term life insurance coverage could expire before you die.

If you end up using the long-term care benefit, the life insurance death benefit may be significantly reduced or completely exhausted and not paid out. This makes sense when you consider you used the long-term care insurance part.

The benefit to those that don’t want to buy a long-term care policy and never use it is the life insurance stays in effect.

This helps you avoid a situation where you would get nothing if you don’t use a long-term care only insurance policy.

Instead, a death benefit gets paid to your beneficiaries.

Cost

For these policies to be affordable, you usually have to buy them relatively early.

Prices go up dramatically if you’re trying to buy this insurance after your 50’s or early 60’s.

As you’d expect, this type of coverage is pricey. After all, it includes long-term care insurance. 

The single lump sum payments are often tens of thousands of dollars. It can even be in the low hundreds of thousands of dollars range. 

The price will depend on the amount of coverage you want, your age and your health.

When Does Hybrid Life Insurance Make Sense?

Hybrid life insurance may make sense for those that fear risk.

It provides an option to get long-term care coverage without the risk of getting nothing in return if you don’t need to use it.

Unfortunately, you’re putting this risk on the insurance provider.

For it to make sense for them, they need to profit. This comes directly out of the premiums you pay and the investments they make with your premium payments.

Before you buy a hybrid life insurance policy, compare it to your other options. Then, consider consulting a fiduciary financial advisor. 

These professionals can help you run scenarios. The scenarios could show you which is the best option for you based on your risk tolerance.

Benefits

Hybrid life insurance wouldn’t be sold if it didn’t have advantages to some consumers.

Peace of mind

The most significant advantage for target customers is the peace of mind it can give. With this type of policy, you know your long-term care costs are covered up to the policy’s limits. 

At the same time, you don’t have to worry about getting nothing. If you never use the long-term care benefits, the permanent life insurance should pay out upon your death. 

May avoid premium increases

Additionally, you can avoid increases in premiums in some cases.

Sadly, many traditional long-term care insurance policies have seen drastic increases in premiums. 

You don’t have to worry that your premiums will become unaffordable. If you choose to make a lump-sum payment upfront, premiums can’t increase. You’ve already paid them in full.

This only applies to the lump sum premium payment option for hybrid life insurance policies.

May be convertible

There may be another benefit if you already have a permanent life insurance policy or qualifying annuity.

Certain policy types may be able to be converted to a hybrid life insurance policy. 

This may be able to be done tax-free through a 1035 exchange. Consult a tax advisor for details.

Drawbacks

Expensive

As you’d expect, the biggest drawback of this type of coverage is its cost.

For many retirees, a policy that costs near or over $100,000 isn’t in the budget.

Potential alternative

To make matters worse, you’re paying for permanent life insurance as part of this policy. This type of life insurance is also expensive, leading to higher costs.

If you’re money savvy, you may be able to buy a long-term care insurance policy by itself. 

Then, you can invest to provide a “death benefit” on your own. Of course, your investments would have to perform as expected for this to work. 

Summary

Long-term skilled care’s rising costs have made long-term care insurance and hybrid life insurance policies a common consideration.

Hybrid life insurance looks to offset the risk of not using long-term care insurance. It adds a permanent life insurance component to accomplish this goal. 

These policies aren’t cheap.

You must carefully consider what you’re purchasing before you buy.

Once you have a thorough understanding of the specific policies you’re considering, you can decide if it is right for you. If you need help, consult a fiduciary financial advisor for advice specific to your situation.