Which came first; Long Term Care insurance or hybrid LTC products? The answer is Long Term Care insurance (LTCI), but this doesn’t mean hybrid products are any less effective. As traditional LTCI becomes more expensive, and interest rates remain low, planners and their clients have become more interested in hybrid LTC products.
What Are Hybrid LTC Products?
Hybrid products match together a life or annuity policy with LTC coverage. These policies are typically funded with a single lump sum premium offering the benefits of a life or annuity base policy with the benefits of a Long Term Care insurance policy.
How it Works
For example, if an individual put $200,000 into a hybrid life/LTC policy, they will receive a $400,000 death benefit if the policyholder passes away, and they will receive $400,000 of LTCI benefits if they get sick and need care. In the meantime, the cash value of $200,000 remains invested and eligible for a modest rate of return of 1-3%. Clients get a long term care benefit if needed, a death benefit if they never make long term care claims, and a guarantee for liquidity on the cash value. Knowing their families get a death benefit if they never need long term care is a big win for many clients.
With a hybrid annuity/LTC policy, they are similar but the policies typically include a small surrender charge if liquidated early and pay a lower rate of interest. The policy simply pays you the cash value at the time of death.
Even so, hybrid products have a few common misconceptions.
Myth: Hybrid policy rates can increase just like LTCI rates
Not true. The primary appeal to these policies is having guaranteed premiums. Especially given the large premium increases that traditional LTC coverage has experienced for policies issued between 1990 and the early 2000s.
However, there’s a slight catch. With hybrids, the insurance company controls the cash value and is under no obligation to pay the going rate of return, especially if interest rates rise. This means it doesn’t matter if the insurance company can’t increase policy premiums by $3,000 per year when they can simply underpay on the interest rate by $3,000 per year.
Myth: If I’m declined for LTCI, I can’t get a Hybrid policy either
This isn’t always true. In some cases, hybrids offer simplified underwriting allowing people to get LTC coverage when they would otherwise be declined for traditional coverage.
Myth: You can take a withdrawal and reinvest it to get better interest rates
While the cash value of a hybrid LTC policy typically remains liquid, taking a withdrawal to reinvest for better rates means you would surrender the policy and forfeit your LTC coverage. For some hybrid policies, the contract offers no rate of return to a client and is equivalent to a client selling a cash option on interest rates to the insurance company. The more rates rise, the more the company can win.
At LTC Consumer, we help clients find the best fit for their needs and financial situation. If you’re interested in learning about which product may be right for you, contact us today to learn more.