With millions of baby boomers, including former and current federal employees, already in retirement or nearing retirement, the need to prepare for paying future long-term care (LTC) insurance appears obvious. Today’s and future retirees face extended life expectancies as well as rising costs for nursing home stays, assisted living facilities, and home health care.
In the 1990’s and 2000’s there was a tremendous push for individuals to purchase LTC insurance because of the strong likelihood of incurring future LTC expenses. But “stand-alone”, individual LTC insurance policy sales have declined nearly 70 percent from 2012 to 2017. A primary reason for the drop in individual LTC insurance sales is increasing premium costs. Many individuals can no longer purchase individual LTC insurance because they can no longer afford to pay the premiums.
In the second of two columns discussing alternatives to individual or stand-alone LTC insurance policies, this column discusses combined life insurance and long-term care insurance policies, commonly called “hybrid policies”.
“Hybrid policies” or simply “hybrids” are reshaping the long-term care niche of the US LTC insurance industry. During 2017, 260,000 individuals purchased hybrids nationwide across the US, far outpacing the 66,000 traditional standalone LTC insurance policies sold in 2017.
To understand why more hybrid policies are being sold today compared to individual or stand-alone LTC insurance policies, it is important to review the history of LTC insurance and the insurance industry.
When LTC insurance took off in the 1990’s, insurance companies directed its sales marketing toward the broad middle class of America. The sales pitch was that LTC insurance policies would save average families from entirely draining their savings, leaning on children for support, or enrolling in the federal-state Medicaid program for the impoverished in order to pay future LTC expenses
But now 25 to 30 years later, insurance companies are finding that their best sales opportunity to individuals concerned about paying future LTC expenses is with wealthier Americans. Many of these wealthy individuals can afford to pay for costlier LTC later in their lives, but are buying hybrids to protect large estates.
Why are potential buyers of LTC insurance buying hybrids and how much insurance do they need? According to Federal government projections, about a quarter of Americans turning 65 between 2015 and 2019 will need up to two years of LTC. Twelve percent will need two to five years of LTC, and 14 percent will need more than five years of LTC. At $15 an hour, around-the-clock aides cost $131,400 a year, while private rooms in nursing homes top $100,000 per year in many places.
Stand-alone individual LTC insurance certainly provides benefits if one needs LTC. In fact, it is a great investment if one uses it. On the other hand, if one does not use it by not ever filing a claim – for examplew, the insured dies before going to a nursing home, assisted living facility or using the services of home health care aids, LTC insurance is like car insurance; namely, the insured pays the insurance premiums but if the insured never has a need to use the insurance, all premiums paid are lost.
One potential problem with stand-alone LTC insurance, whether it is part of a group plan, such as the Federal Long-Term Care Insurance Program, or an individual LTC policy, is that premiums increase over time. Also, fewer and fewer insurance companies are offering stand-alone LTC insurance policies, and the 10 to 12 companies that still provide LTC insurance are raising premiums to both new and existing policyholders to the extent that many existing and potentially new policyholders can no longer afford to pay the premiums.
On the other hand, hybrid policies provide a certain amount of LTC insurance coverage and with some hybrid policies feature premiums that are guaranteed not to increase over time. They also lifetime benefits that are tax-free, as well as a death benefit for beneficiaries.
Hybrid plans can initially cost even more than traditional stand-alone policies because they typically include these extra features. One type of hybrid known as “asset-based long-term care” includes a guarantee that premium rates will not increase over time.
Besides providing a death benefit, many hybrids also provide a “return of premium” feature. This allows policyholders to recoup much of the premium dollars they invested in the policy if they want “out”, although the premiums they paid will be returned with no interest.
While there is much flexibility associated with hybrid plans, potential buyers should be warned that upfront premiums can be considerably higher, sometimes as much as 40 to 50 percent higher than a stand-alone LTC insurance policy. Those employees who are interested in purchasing a hybrid plan to address their future LTC needs are encouraged to contact an experienced LTC insurance broker. The broker should provide at least three quotes from different insurance companies offering hybrid plans. Potential buyers should also carefully examine the separate costs of any riders that are attached to the hybrid policy.
For asset-based LTC hybrid policies, buyers are required to deposit a huge sum of money with the insurance company instead of paying premiums. The policyholder receives interest on their deposit and when they have a need LTC, the insurance company reimburses the insured for LTC expenses incurred. The amount of reimbursement is based on how much the policyholder deposited and how old they were when they purchased the policy. They younger they are when they make the deposit, the more LTC benefits they get for their money. If the policyholder does not use the policy, he or she should be able to get their deposit back, without interest. If they die without needing LTC, their heirs are eligible for a full death benefit.
Finally, there are life insurance policies (both term and permanent policies) that feature an LTC rider that accelerates the death benefit to pay qualified LTC expenses, but with a caveat. Payment of qualified LTC benefits reduces the potential death benefit and cash surrender values (associated with permanent policies) that would be paid upon the death of the insured.