Hybrid Long-Term Care and Short-Term Care Options

We see the consequences of long-term health care daily. The impact of changing health due to aging or other factors adversely affects our families and finances. 

You see the changes in your health, body, and even your memory as you get older. For Generation X and Boomers, it is on your mind as you think about your future retirement. As the parents of these generations have aged, their adult children (age 40 to 60 primarily) have seen first-hand the costs and burdens long-term health care places on finances. 

Long-term health care is more than just a financial problem - it is a cash flow problem and a family problem. The additional burden of caregiving or managing professional care services is primarily placed on the daughters and daughters-in-law, creating conflict within the family.

The role of the caregiver is physically and emotionally demanding. Long-term health care is expensive and getting even more costly due to generational factors, greater demand for services, and higher labor costs.

In Washington, there has been bi-partisan support of private Long-Term Care Insurance since the Clinton administration. In addition to federal and state tax incentives available for some people and businesses, Health Savings Accounts allow you to use pre-tax money toward paying your premium. 

Traditional Plans Still an Affordable Option

First, let's review Traditional Long-Term Care Insurance. Traditional Long-Term Care Insurance is still the primary way people address extended health care. Most states have partnership plans which provide additional dollar-for-dollar asset protection. These insurance policies are very affordable if purchased younger when your health is usually much better.

For example, a healthy married 50-year-old male could obtain a partnership certified policy in Colorado, featuring $4000 a month with an initial $150,000 growing by 3% compounded for life would run about $130 a month with a major company. Premiums vary depending on the company, your age, health, family history, and the amount of benefits purchased, and premiums can vary over 100% between insurance companies for the same coverage.

The smaller the initial benefit you have in your policy, the lower the premium; the larger your benefit, the bigger the premium. Spousal discounts exist as well.

Premiums are intended to remain level. Some companies have had approved increases on older "legacy" policies priced decades ago before rate stabilization rules and record low-interest rates. Today, any increase must be approved by the state's insurance department and must impact a class of people, not an individual. Most states have rate stability rules in place, and companies price their products factoring in the extremely low-interest rates - Will Long-Term Care Insurance Premiums Go Up? | LTC News.

“Interest rates or investment return is vitally important.”

“Years ago, when interest rates were higher, an insurance company easily assumed a five percent interest rate when it priced policy for a 55-year-old.  If the actual interest rate was closer to say one percent and assuming every other actuarial assumption was correct, they would need a 50 percent or greater premium increase to pay out future claims.”

Jesse Slome, Executive Director for the American Association for Long-term Care Insurance (AALTCI) 

Rate Stabilization Rules Benefit Consumers 

As mentioned above, today's Long-Term Care Insurance policies are priced for the low-interest-rate environment we have been experiencing. Also, experts say underwriting criteria are much more conservative than they were 20 years ago. 

For consumers today, this is good news. Many states have rate stabilization rules, making it much harder for an insurance company to raise the premium on these policies.

Asset-Based or "Hybrid" Plans Provide Long-Term Care and Death Benefits

Today other options are available. One option getting the attention of the news media and advisors is an asset-based "hybrid" Long-Term Care policy. A hybrid policy is typically a life insurance policy or annuity with a rider for long-term care. While many insurance companies offer these types of policies, experts warn consumers to be careful of policy language.

These "linked-benefit" policies accelerate the death benefit (or cash value) and provide an extension of benefits for long-term health care once the death benefit has been used to pay for care. These policies follow the guidelines under federal law for Long-Term Care Insurance (U.S. Tax Code Section 7702(b)). 

The upside and benefits of these "hybrid" policies? You could get all your money back, and more, if you never require care. Most of these plans are single premium (or annual payment that can never go up). The single premium could be $75,000 or more, depending on your age and the amount of long-term care benefit you wish to have available. 

There are also life insurance policies with an acceleration of death benefit rider. While these policies follow the same triggers as any Long-Term Care Insurance policy, they are less valuable as a solution for long-term care.

Once you qualify for benefits, the insurance company will accelerate the death benefit back to you monthly. The insurance company is just giving you the death benefit early. There is no "extension" of benefits and usually no inflation benefit. The total amount of the benefits is equal to the death benefit.  

Downside of Hybrid Policies 

The downside? Experts say the opportunity cost of the single premium may not be worth it for some people. Many people don't want to use money that should be set aside for retirement expenses. 

Traditional Long-Term Care Insurance is usually a better value for most people. However, there are situations where a hybrid may be a great option. If you have savings sitting in low-return investments, a hybrid plan could be a solution. For those who like the idea of paying one premium and knowing they will get the money back for either long-term care or in the form of a death benefit, a hybrid is a solution. 

A specialist in long-term care planning can discuss the pros and cons of this type of policy.

Be careful. Sometimes life insurance gets marketed as a long-term care solution - but it is not! A life insurance policy with a "chronic illness" rider allows you to access the death benefit before you die, often only a limited portion of the death benefit – if the eligibility conditions are met. 

The definition of being "Chronically Ill." is not regulated by any government agency, so it varies depending on the insurance company. Traditional Tax-Qualified Long-Term Care Insurance and Hybrid (linked-benefit) policies use regulated triggers for benefits.

In some cases, these "chronic illness" rider policies require the policyholder to be "permanent," meaning there is no chance of recovery. Others require you to be "terminal," meaning you must have no chance of recovering, or your condition must lead to death. 

Most long-term care situations are not deemed "terminal." Some long-term care events are not "permanent." Plus, some policies will not pay benefits over a certain age (making them a bit useless for long-term care). 

The best policies for long-term care planning use the regulated language triggers for Long-Term Care Insurance. If you are considering a combination product (combing life insurance or an annuity with long-term care benefits), only consider a true "hybrid" Long-Term Care policy that meets federal guidelines (U.S. Tax Code Section 7702(b) for Long-Term Care Insurance.

All insurance products that meet these federal guidelines contain consumer protections and regulated benefit triggers, in addition to tax advantages. 

Limited Duration / Short-Term Plans

The third option is what the industry describes as "Short-Term Care." These are limited benefit plans designed to be affordable and available to those with some pre-existing health problems or older adults who may not qualify for traditional plans.

These short-term policies offer one to two years of benefits. Don't confuse this to mean your policy is only good for one or two years. Once you start receiving benefits, your benefits will exhaust in one or two years.

While this type of solution is not considered a complete solution for long-term health care - it will help your family when they most need it.

The vast majority of buyers (90 percent) of Short-Term Care insurance policies were age 60 or older; however, younger consumers with health issues that make them otherwise uninsurable or difficult to insure may find this an ideal and affordable solution. 

You need some plan to address the costs and burdens of aging. People require extended health care due to an illness, accident, or the impact of aging. 

If you have little or no assets, the Medicaid program is available. Otherwise, consider some plan to reduce the financial impact long-term care will have on your assets. Remember, long-term care planning is not all about money. Yes, long-term care expenses will create a cash flow issue, but it is also a family issue.

Prepare your family and finances for future long-term care before you retire, ideally in your 40s or 50s. Be sure to seek the assistance of a qualified Long-Term Care Insurance specialist who can guide you properly. 

“Some 45 percent were between ages 61 and 70 and around a third (36.5%) were between 71 and 80.”

“It’s a great option for people who waited too long to start the Long-Term Care planning process.”

Jesse Slome

Can You Self-Fund for Long-Term Care Expenses?

There is a fourth option: Roll the dice and do nothing. Self-funding future long-term health care expenses mean you become the insurance company. Usually, it means your family will become caregivers and decide how much of your money will be used for paid professional care. They control the quality and setting of your care, and they may not make the same decisions as you would.

Don't forget; there may be tax consequences when you self-fund your future long-term health care. Your family may have to sell off stocks, mutual funds, bonds, etc. You can't time the market with your need for care. Even a 'loss' could still be a taxable 'gain.'

The risk of needing long-term care services and supports is high, especially as you get older. Since you can experience changes in your health at any time, it is best to obtain coverage when you still enjoy relatively good health.

“I'm a huge fan of this insurance. If you become ill, it ensures that your spouse will have enough money to eat and your kids won't be burdened with huge payments. Not having LTC insurance can be a $300,000 to $400,000 mistake.”

 Dave Ramsey, a nationally known author, and radio talk show host.

Tax Incentives for Qualified Long-Term Care Insurance Policies

Don’t forget to consider the tax benefits of these plans. In addition to being able to use pre-tax money from Health Savings Accounts, you can deduct premiums if you itemize under the medical expense section. Also, if you are self-employed or own an LLC, S Corporation or C Corporation the premiums can be a tax-deductible business expense. Seek the advice of a tax professional for details.

Also, many states offer tax incentives as well. Those states are:

The AALTCI says to work with a Long-Term Care specialist who represents all the top companies to help you learn your options and shop and design an affordable plan to make sure you have a successful retirement.