You cannot always make a gamble and hope things will be okay. Although the prospect of suffering from an impairing illness late in life is not a pleasant one, it’s, all the same, a possibility for the majority of us. That’s why it makes sense to tie the loose ends and protect yourself and your family from possibly financial hardships by purchasing long-term care insurance.
Costs of long-term care in this country are skyrocketing, with the average annual stay cost at a nursing home being more than $90,000. That means if you were to stay at a nursing home for 4 years, you’d need to pay about $360,000 and let’s not forget that’s just the baseline figure. Other unplanned costs might crop up.
How does long term care insurance work?
When you buy long term care insurance and pay premiums, the insurance company pays for long-term care if you ever need it. Some people are quite skeptical about LTC policies because they feel their premiums are wasted if they die without ever needing long-term care. As a way to counter this, insurers have come up with what’s called ‘hybrid policies’. Such policies combine permanent life insurance with long-term care insurance. Like typical whole life insurance, hybrid policies have a savings-component that builds up with time.
The policyholder can withdraw money from their policy if and when they need long term care. And here’s the best part – the insurance company pays for the care if policy funds run out. Better yet, if the policyholder dies without ever needing to use expensive LTC, selected beneficiaries receive death benefits. In either case, money is not lost with a hybrid long term care policy.
What are the benefits of hybrid plans as compared to traditional policies. “Over the last few years, we have seen a dramatic increase in the number of clients who are foregoing the traditional plans and instead opting for hybrid policies. Most of these people have similar concerns. To start with, they are bothered by the ‘use it or lose it’ scenario that surrounds traditional policies. People are asking, what happens if I peacefully pass away I my sleep? Will all the $60,000 or $80,000 that I have invested in long-term care insurance premiums go to waste? In my own opinion, the flexibility of hybrid plans, and the fact that you get paid up, either way is the number one reason why more American policy buyers are settling on hybrid plans as compared to traditional ones,” Frank Meyers, an LTC industry insider.
Of course, this fear of traditional policies by clients appears to be quite misplaced or at least emanating from having wrong expectations. ‘Use it or lose it’ is essentially the nature of insurance. It’s mandatory to purchase auto insurance in this country and around the world. But even if it weren’t, I don’t think we’d still have a lot of people who’d refuse to purchase car insurance just because they might never use it. The same applies to home insurance. What’s even more contradicting is this; you’re much more likely to need long-term care than you’re likely to have a car crash or lose your home.
Nonetheless, hybrid policies appear to be coming to the rescue for these consumers. Hybrid policies reduce people’s fears of wasting their premiums because either way, your investment is not lost.
If a hybrid policyholder decides to cancel the policy after the surrender charge period (usually 10 years), they still get most of their money back. Of course, the insurance company lets you know that you won’t make any return if you cancel your policy. But it’s comforting to know that you can at least get a do-over if something comes up down the road and makes you change your mind. Secondly, there’s a death benefit paid out to your beneficiaries after you die. It’s another thing to know that in the event of your death, your kids will get the money you paid in premiums.
Another common benefit of Hybrid Policies over traditional policies is that benefits are guaranteed. If you pay the required premiums for about 10 years or less, your death benefit is contractually guaranteed. You’ll also have a guaranteed amount of LTC coverage, and a guaranteed cash value. Traditional LTC insurance policies do not offer these guarantees. In fact, carriers can petition your state’s insurance department to increase your premiums, sometimes up to 50% per year. This can be a problem, especially for some retirees who have limited assets.
What’s the catch?
Premiums for hybrid policies have to be paid over shorter periods of time compared to traditional long-term-care plans. This essentially makes them unaffordable for some clients. You also tend to pay more with a hybrid plan than you would with a stand-alone long term care plan.
This is one of the most common questions LTC insurance agents have to address. Consumers are trying to weigh between the security and larger cost of a hybrid plan, versus the lesser cost and risk of losing money with a traditional plan. Hybrid policies make sense if you’ve already concluded you’re not happy with the ‘use it or lose it’ approach to a traditional policy and are able to afford the higher premiums. Of course, you have to look at the numbers before you make the buying decision. It also helps to compare between different types of insurance companies to see who’s got what. At the end of the day, each policy should be judged on its own merit.
If you cannot stand the thought of paying over $50,000 in premiums and potentially losing every dime, you might be drawn to hybrid long term care insurance.