Insurance companies have become very creative when it comes to designing new products that bundle different types of coverage in a way that makes sense to consumers and to the insurance company’s bottom line. This new hybrid is an example of that kind of thinking. The question is, will this particular hybrid give you the long term coverage you need in the event of a devastating illness or injury?
Kiplinger’s article, “Hybrid Insurance Policies Gaining Steam," notes that the most popular hybrids attach a long-term-care rider to a whole or universal life insurance policy. People can usually pay a single up-front premium. If they never need long-term care, their heirs will receive the death benefit.
By paying a single premium or series of set premiums, you don’t have the risk of premium increases in the future. That’s an issue that has been a negative feature of traditional long-term-care policies. Many people have also balked at the “use it or lose it” concept that goes with traditional long-term-care policies. A hybrid policy’s potential death benefit eliminates that concern. However, those advantages aren’t as clear as they appear, since traditional long-term-care policies priced today have a low risk of future premium increases, according to new research by the Society of Actuaries. By giving up a large chunk of change for a hybrid policy, you’re giving up earning a market rate of return on that money.
When comparing hybrid products against traditional long-term-care insurance policies, think about how you might invest the money that’s not spent on premiums. If you would look for a moderate return and might need the money to cover living expenses, stand-alone long-term-care insurance may make more sense. With either choice, be sure to also consider inflation protection and evaluate how much you value a hybrid policy’s life-insurance component—which adds extra cost. For many of those purchasing hybrid products, life insurance is an afterthought.
If you really need life insurance, a hybrid product may not be the best choice. This is because a long-term-care claim will decrease the death benefit. If you need both long-term-care and life-insurance protection, you’ll be better off buying both types of policies. Don’t merely take care of whichever one comes first.
Do your homework when it comes time to purchasing these kinds of insurance policies. Be sure to compare the LTC coverage options, policy premiums, death benefits and cash values. If you are not sure about whether or not the policy will protect you and your family, review the actual policy with an estate planning attorney before you sign anything.
Reference: Kiplinger’s (January 2017) “Hybrid Insurance Policies Gaining Steam"