Long-term care (LTC) insurance hybrids—which pair traditional LTC insurance with either a life policy or an annuity—have emerged as an increasingly popular and versatile financial solution.
To use hybrids to your clients’ full benefit, however, it’s important to understand how they work, who they’re appropriate for, and how to choose specific policies.
Hybrids were created to address consumers’ reluctance to pay premiums and deplete their hard-earned savings and investments to obtain potential benefits they may never use.
There are two major types of hybrid, each of which provides LTC protection along with an additional benefit. Unlike most LTC policies, they also have surrender benefits in case your client decides to pursue other options later in life.
Life insurance hybrids
Usually funded with a single premium, these plans offer clients the opportunity to achieve a “triple-play” of sorts. For example, a client with $100,000 to allocate to a LTC-life hybrid may be able to:
- Insure for LTC: Their $100,000 might buy, say, $500,000 of LTC benefits.
- Insure their life: The same sum might create a $175,000 death benefit if LTC benefits are not used.
- Insure their decision: Policy surrender benefits give them the freedom to change their mind later.
As with other types of underwritten insurance, the actual amount of benefits will vary with the client’s age, gender and health.
Somewhat less popular in this era of extraordinarily low interest rates, LTC-annuity hybrids allow clients to accumulate tax-deferred cash values while enjoying LTC protection. Typical LTC benefits are two to three times the annuity value.
If you’ve spent your career offering nothing but annuities, you may be in for an adjustment with LTC-annuity hybrids, given their need for underwriting. Be aware that some carriers offer streamlined underwriting, but that doesn’t necessarily mean easier. Clients with health issues may actually benefit from full underwriting (Firms like LTCI Partners can usher your client through underwriting for you).
It’s important to realize that, since hybrids provide two distinct benefits, those benefits won’t be as rich as if you used the full sum to purchase just one of them. For example, $100,000 would buy a larger stand-alone, single-premium life policy than $100,000 used to build a combination of both LTC and life insurance benefits.
Which clients are best-suited for hybrids?
In my experience working with producers across the country, I’ve found hybrid policies are most appealing to clients who:
- Have substantial savings set aside, which could include cash values in an existing life policy.
- Have existing life or annuity policies that can take advantage of a Section 1035 exchange provisions.
- Have previously considered LTC and decided against it because they were convinced they wouldn’t use it.
- Are older than traditional LTC buyers—average age of purchase is about 68 compared to 58 for traditional products.
- Are not business owners who may benefit from the tax advantages of traditional LTC plans.
While the ability to borrow against policy cash values or surrender the policy completely has some appeal, be sure you don’t oversell those options. Loans can significantly impair the LTC benefits, and there could be significant tax consequences of a surrender or loan —particularly for life hybrids, since the typical single-premium usually turns them into Modified Endowment Contracts.
As with any product, finding an LTC hybrid that’s worthy of your clients’ money starts with studying the market. As you do, keep in mind that the growing appeal of hybrids is attracting new entrants to the field—some of which may have limited experience with LTC.
That’s no small concern—the claims process for life insurance is fairly straightforward, but obtaining benefits for LTC needs can be vastly more complex. To minimize the risk of future disappointment and turmoil for both you and your client, it may be wise to favor experienced carriers until some of the newer names build experience and a record of excellent service in this very specialized field.
Of course, in addition to big-picture considerations like financial strength and product experience, it’s also important to study specific features and benefits, which can vary greatly from issuer to issuer and even from contract to contract. In the LTC world, that means carefully studying features like:
- Elimination periods: Does the policy offer options to help you tailor coverage to individual client needs?
- Ancillary benefits: Since most clients want to stay at home as long as reasonably possible, are there benefits for home modification and respite care?
- Policy definitions: Claims are driven by definitions—such as what constitutes a “facility” or a “caregiver” or “home care.”
The emerging LTC hybrid product field is becoming more crowded over time, and my industry contacts indicate the product development pipeline will likely produce new alternatives later this year. If you prefer to focus more on identifying long-term needs and less on the nuts and bolts of policy selection and application, you may benefit from partnering with an LTC market specialist firm, which can help you present the case for LTC insurance solutions and guide you and your clients from initial presentation to underwriting and policy issue.