Hybrid Policies: Merging Long-Term Care and Life Insurance
One of the most significant concerns when purchasing long-term care insurance is the possibility of paying substantial premiums for a benefit you may never utilize. These policies assist with costs associated with nursing homes, assisted living facilities, or home healthcare. However, if these services are not needed, the investment may seem wasted. As a result, a new wave of policies has emerged that combine long-term care insurance with permanent life insurance, such as whole or universal life. If you require both types of coverage and have the financial means, these hybrid options merit consideration.
How Combination Policies Function
Combination long-term care/life insurance policies provide funds for long-term care expenses not covered by standard health insurance or Medicare. Furthermore, if you do not exhaust the total long-term care benefits, the insurer pays a death benefit to your beneficiary. Linked-benefit or asset-based policies operate as follows:
- You pay a lump-sum premium or a series of large annual premiums, typically over a period of less than ten years. This is according to data from LIMRA, a life insurance trade group.
- The average cost for a single-premium combination policy is about $71,700 for men and $76,740 for women, according to the American Association for Long-Term Care Insurance.
- The policy offers a pool of money for long-term care, which can be several times greater than your premium payments. The exact amount is determined by your age, gender, and health at the time of purchase.
- The policy’s death benefit is reduced based on the amount of the long-term care benefit you use. However, some policies guarantee a specific percentage of the death benefit, such as 10% or 20%, even if all funds allocated for long-term care are used.
You may need to provide medical records and complete a life insurance medical examination to qualify for some combination policies. Other policies provide “simplified underwriting” where answering health questions via phone may be all that’s required. Depending on your health, you may pay less for coverage if you opt for a policy that requires both an exam and submission of medical records.
The popularity of combination long-term care/life insurance policies is increasing. In LIMRA’s 2024 Life Insurance Barometer Study, 28% of Americans indicated they were very likely to consider a combination policy when shopping for life insurance.
Advantages of Combination Policies
Besides assuring you receive some benefit from your premium payments, the primary benefits of combination policies are:
- These policies can be a valuable option if you would have otherwise kept funds in a nominal-yield account.
- You are shielded from premium increases with a lump-sum payment, while a policy with a restricted number of payments may even lock in premiums. Some owners of traditional long-term care insurance policies have experienced premium doubling as expenses have surpassed insurance companies’ projections.
- Certain combination policies include a money-back guarantee. The insurance company offers a complete premium refund if you decide to cancel the policy after a set time, such as five years. You can also get a partial refund before that period.
Disadvantages of Combination Policies
A combination long-term care/life insurance policy may not be the best choice if:
- You only need life insurance. In this situation, a standard term or permanent life insurance policy is the best option. Term life insurance, designed to cover the years your family depends on your income, is a suitable choice for many individuals.
- You don’t desire permanent life insurance. If you only need temporary coverage, consider term life insurance, which is generally more affordable.
- You don’t need life insurance. These policies factor in “cost of insurance” charges for the life insurance aspect.
- You lack approximately $75,000 (or more) to invest. The American Association for Long-Term Care Insurance states combination policies are best for those with “lazy money” in low-interest CDs or money market accounts.
Recommendations Before Deciding
If you are considering a combination policy, get quotes from several insurers, and check the insurance companies’ financial strength ratings. This can be done quickly on the websites of independent rating firms, such as AM Best, Fitch Ratings, Moody’s Investors Service, or S&P Global. (You might need to register on some sites for access, but registration is free.)
Combination policies are multifaceted products with varying costs and benefits. Before committing, consult a financial advisor who understands these products and can compare them to traditional long-term care and life insurance alternatives.
