Hybrid Long-Term Care – The Best of Both Worlds?

By James Moore, CFP®

It has been a challenging time for some who own or are looking to purchase a long-term care (LTC) insurance policy. Over the last few years, premiums for existing policies have increased significantly, sometimes as much as 90%. And it’s not just existing policies that have been affected—new policies have become much more expensive as well.

These cost increases have led many to look for alternatives to traditional LTC insurance. One alternative growing in popularity is the hybrid LTC policy, which combines LTC insurance with life insurance or an annuity. The main selling point for these products is that they usually contain a guarantee that LTC premiums will never increase for the policy holder. With all the recent rate increases, that promise sounds really appealing on the surface!

With rising LTC premiums, is a hybrid policy the best solution to protect against potential premium increases in the future?

Unfortunately, these hybrid policies are not a silver bullet. While they have interesting features that could make sense for some individuals, the premium guarantee is mostly an illusion.

The main challenge with products like these is that they are so complicated—there’s often a life insurance component, cash value component, and a LTC component among other things. This allows the insurance company to play some games by moving money around those different buckets. The insurance company is not necessarily being nefarious, but the contracts are typically so complicated that most people probably don’t fully understand how the products work.

So how can an insurance company promise they will never raise premiums? After all, the LTC insurance cost is a real cost—if an insurance company doesn’t receive enough in premium payments to cover what they pay out to cover claims, the insurance company will fail. Insurance companies are heavily regulated and have lots of smart actuaries creating these products, so you can bet they are not (intentionally at least) handing free money out.

The main reason why hybrid LTC policies can guarantee no premium increases is that they control the rate of return on the cash value portion of the policies. They either set up the policy to have lower-than-market returns or they maintain the right to lower the interest rate on the cash balance at any time. For example, if true LTC costs go up by $500 one year, the insurance company can simply under-pay on interest by $500 to cover that cost. It may feel less “painful” to avoid explicitly paying higher premiums, but by receiving a lower investment return on the policy cash value, the end result is the same.

Are there any other downsides to a hybrid long-term care policy?

Hybrid LTC policies have some of the same problems found in other annuities and whole life insurance policies (see our other articles on annuities). You are often better off in the long run by keeping insurance and investments separate. Just as it usually makes sense to buy term insurance and invest the rest, it likewise often makes sense to buy pure LTC insurance and invest the rest.

At the end of the day, it’s important to recognize that there’s no free lunch with the premium guarantee unless you think that these products have been poorly underwritten – in other words, if you believe the insurance company has made a mistake in pricing the policy too cheaply.  While that could be a possibility, we strongly encourage you to read the entire contract and fully understand all the details even if you think that’s the case.

It’s also worth mentioning that fears of future LTC premium increases could end up being overblown. We tend to focus on what has happened in recent memory and we have to be careful not to overreact.  It is likely that the recent painful premium increases have made current LTC policies priced more reasonably than they were before. Insurance companies know a lot more about LTC pricing than they did a few decades ago, so the risk of drastic underpricing seems like less of a possibility now. But even if LTC policies are priced more accurately now, they are still very expensive for most people!

Could a hybrid LTC ever make sense?

Yes, a hybrid LTC policy might be appropriate for certain individuals. Some particular hybrid LTC policies have more relaxed underwriting standards than traditional LTC policies. If you are in poor health and do not qualify for traditional LTC insurance, it is possible that you may qualify for some type of hybrid LTC policy. Assuming that LTC insurance makes sense for your circumstances, a hybrid LTC policy might be the only way to obtain the coverage.

Ultimately, the best way to approach long-term care depends on your specific situation. Our Fullerton financial advisory firm is happy to help you evaluate your options. Please feel free visit our website at www.eclecticassociates.com to schedule a complimentary phone call or meeting with one of our fee–only financial advisors.