Updated: Dec 10, 2019
Hybrid life insurance and long-term care insurance (Hybrid LTC) offers a compelling alternative to traditional long-term care (LTC) insurance. Through an innovative approach in policy design, Hybrid LTC combines the benefits of LTC coverage with the protection and surrender options of life insurance.
What is Long-Term Care (LTC)?
LTC encompasses a wide range of supportive and health services that are required when an individual suffers from a chronic illness, or an accident renders then physically or cognitively unable to care for themselves. These services can be very costly and many people choose to protect themselves against this risk by purchasing LTC insurance. LTC is not medical care and is not limited to nursing homes.
The Cost of Long-Term Care
LTC costs can vary widely depending on the region and setting in which care is received. Services are typically received in the home, at an assisted living facility, in a nursing home, or at an adult daycare center.
As indicated above, the total annual cost of care is substantial and will continue to rise. For example, the national average of the cost of care for one year in a nursing home exceeds $85,000 and is growing at an average of 3.5% per year.
Statistics show that an estimated 7 out of 10 Americans will need LTC at some point in their lives.
Let's take San Francisco, California as an example of LTC costs:
$11,340 / month: Nursing Home with Private Room
$5,918 / month: Assisted Living
$19 / hour: Home Health Care Aid
$125 / day: Adult Day Care
Paying for Care
One of the most important factors to consider in planning for LTC is how to pay for the care. The majority of costs associated with chronic conditions that required LTC are not covered by most medical insurance or by government programs such as Medicare or Medicaid.
Medical insurance may provide short-term care coverage for specific medical conditions, but it is not intended to provide long term benefits to cover chronic conditions. Similar to medical insurance, Medicare is designed to cover acute medical care. In most cases, Medicare will only pay a portion of expenses for the first 100 days of care, an only if acute care is received in a hospital setting.
Medicaid programs are generally designed to provide care for those who would otherwise not be able to afford it. Medicaid requires participants to spend-down most of their assets to qualify for assistance.
Long-Term Care Insurance
LTC insurance policies are a planning option for individuals who may need to pay for LTC expenses in the future. These policies provide not only payment for care, but also provide control, choice, and financial independence.
Qualified LTC insurance policies offer tax-free benefits to cover the costs of a multitude of LTC services in a variety of settings. Policies must meet certain standards with regards to service and benefit triggers - a key element being a contract must use at least five of the following six activities of daily living (ADLs) in determining whether the insured is chronically ill:
Eating, toileting, transferring, bathing, dressing, and/or continence
Hybrid Long-Term Care Life Insurance
Hybrid LTC Life Insurance products are an enhanced version of traditional LTC insurance policies, combining the benefits of LTC coverage with the protection of life insurance. This is accomplished through an innovative approach in the policy design.
In a typical hybrid policy, a single premium is used to fund the insurance. Often, the funds for this premium may come from allocating funds from a current asset or managed portfolio.
What is different? The hybrid approach provides liquidity in any of the following events:
Terminate and surrender the policy before using any long-term care benefits
Need to use the long-term care benefits
Die before you use any (or only a portion) of the long-term care benefits
Let's take a look at the economics for a Hybrid LTC Life Insurance product scenario:
The graphic below calculates the Internal Rate of Return (IRR) and premium leverage associated with utilizing long-term care benefits within a life insurance product. The IRRs and leverage assume (a) the LTC benefit is paid at various start ages, (b) the benefit is paid for a six-year benefit duration, (c) a 3% compound annual inflation adjustment on the LTC monthly benefit, and (d) no life insurance death benefit is paid.
The rising cost of long-term care (LTC) requires careful planning to protect assets from the potential for substantial depletion. The unique policy design of hybrid LTC life insurance offers a way to obtain this protection, while ensuring the wealth (premium cash flow) will not be lost if benefits are never needed.