What Is Hybrid Long-Term Care Insurance? (Life Insurance & Long-Term Care Insurance Combined)

As we age, planning for the possibility of needing long-term care becomes essential. Protecting your savings and assets with Long-Term Care Insurance is a great way to anticipate care needs. 

But Long-Term Care Insurance isn't one size fits all, in fact, there are several different types of Long-Term Care Insurance policies. One such policy is a hybrid policy, which combines life insurance or annuity and Long-Term Care Insurance into a single plan. But what exactly does that mean?

At LTC News, we want to help you learn about all your options for long-term care. We collaborate with dedicated and passionate long-term care experts to address these topics and help you stay informed.  

Today, we'll dive into what hybrid policies are and why they might be a good fit for you or your loved one. We'll also discuss the nuances of hybrid policies and how your coverage can vary depending on your preferences.  

What Is a Hybrid Long-Term Care Insurance Policy?

A hybrid Long-Term Care Insurance policy is a life insurance policy or annuity with a qualified rider for long-term care. 

Hybrid policies offer the benefits of both insurances in one single policy. Some people or advisors may also refer to hybrid policies as asset-based or combination policies. 

For the sake of this article, we'll be using the term "hybrid." We'll be calling normal, non-hybrid policies "traditional" policies. Traditional Long-Term Care Insurance policies only offer benefits for long-term care. 

Traditional policies do not offer death benefits or combine long-term care coverage with any other type of insurance (although some may offer a "return of premium" rider at death). 

To learn more about how traditional and hybrid policies differ, read our article on the different types of Long-Term Care Insurance policies. 

How Do Hybrid Long-Term Care Insurance Policies Work?

True hybrid Long-Term Care Insurance policies meet federal guidelines under Section 7702(b), combining long-term care coverage with a death benefit or annuity. 

You must meet the benefit triggers to get care coverage with a hybrid policy. The benefit triggers, consumer protections and tax incentives on hybrid policies are the same as any traditional Long-Term Care Insurance policy.

A benefit trigger is a guideline determining when an insurance company will cover care. With tax-qualified Long-Term Care Insurance, an individual meets the benefit triggers when they need either:

• Help with two or more activities of daily living that are expected to last at least 90 days.

OR

• Supervision due to cognitive impairment. 

If you meet either of those requirements, the policy will begin to pay benefits in one of two ways.

One is a reimbursement for the cost of long-term care up to a predetermined benefit level that the policyholder selects. 

The other option pays a predetermined monthly cash benefit to cover care costs, no matter the actual cost of care.

The amount of benefits or money in a policy depends on the death benefit. Some hybrid policies only use money directly from the death benefit to pay for care. Others use a combination of death benefit money and offer a separate pool of long-term care benefits. 

We'll discuss each different type of hybrid Long-Term Care Insurance policy and how they function below. 

Three Types of Hybrid Long-Term Care Insurance

There are three types of hybrid policies. Below, we’ll explain what each policy offers and how they differ from one another. We’ll also cover a policy that is commonly mistaken as a hybrid or Long-Term Care Insurance policy. 

1. Life Insurance With an Accelerated Death Benefit Rider for Long-Term Care

The first type of hybrid policy is a life insurance policy with a long-term care rider. This policy uses a portion of the death benefit to pay for long-term care. In other words, the policy accelerates the death benefit to cover the cost of care. 

This policy uses a single pool of money to pay out the death benefit and long-term care benefits. It prioritizes life insurance over long-term care. 

The accelerated death benefit amount is based on a percentage of the death benefit. Some companies allow policyholders to use 100% of the death benefit for long-term care. Other companies let policyholders choose a percentage at the time of application. 

When an individual goes on claim, their policy will pay between 2% to 4% of the total death benefit amount each month. 

For example, let's say your total death benefit amount was $100,000. The policy allows 100% of the death benefit to be accelerated for long-term care at 2% per month. Your monthly benefit would come out to $2,000/month for 50 months. 

Any part of the death benefit not used for long-term care will go to the policyholder's beneficiaries upon death. Beneficiaries receive these benefits tax-free.  

Life insurance policies with an accelerated death benefit for LTC riders generally offer the least amount of long-term care benefits compared to other hybrid policies. They may work best for those who value life insurance over long-term care coverage. 

2. Linked Benefit Life Insurance Policy With Long-Term Care Extension of Benefits

The second type of hybrid policy is called a linked benefit life insurance policy. These policies combine life insurance with Long-Term Care Insurance by allowing policyholders to add a long-term care extension of benefit add-on to their life insurance policy.

The linked benefit life insurance policy prioritizes long-term care.

Linked benefit life insurance policies work similarly to life insurance policies with riders. The only difference is after the accelerated death benefit runs out, there's an extra pool of money to pay for long-term care. 

These policies offer two pools of money. One pool of money is a death benefit that can be accelerated to pay for care. The other is a pool of money designated to pay for care after exhausting the accelerated death benefit. 

In most linked benefit policies, the accelerated death benefit can provide care for two to three years. The extension of long-term care benefits can offer an additional three to five years of care.

In addition, there is also one company that offers an unlimited extension for long-term care benefits, meaning a policyholder could never exhaust the benefits no matter how long they needed long-term care services.

Individuals can pay premiums in a single lump sum or spread out over the course of three to twenty years. However, there are also options to pay as you go, often called an annual premium for life. Premiums are guaranteed by contract and can not increase. 

3. Linked Benefit Annuity Policy With Long-Term Care Extension of Benefits

The third type of hybrid policy is a linked benefit annuity policy with a long-term care extension of benefits.

An annuity is an insurance product that pays out retirement income at a chosen age. Individuals usually get annuities at a younger age to save for retirement. They'll pay a premium that directly goes into the annuity fund. 

Linked benefit annuity policies provide long-term care coverage in a unique way. When a policyholder files a claim, companies use the contract value of the annuity to determine the monthly long-term care benefit.

To calculate the monthly benefit, companies use either double, triple or more above the contract value of the annuity. Then, they divide this larger amount by the number of months the long-term care benefits can be paid out. (There is also one company that offers an unlimited amount of long-term care benefits.)

Companies vary on how these products are illustrated and the underwriting criteria. Always seek help from a qualified Long-Term Care Insurance specialist.

However, consider this example from one top-rated insurance company. Let’s say there is a 65-year-old male with a $100,000 premium. The long-term care benefit is created by taking the current accumulated value (which is guaranteed, although it could increase based on interest rates) and adding the COB (continuation of benefits rider value) to create the total long-term care benefit.

In this example, the $100,000 premium turns into a total long-term care benefit of $404,413. This results in an initial monthly benefit of $4,212, growing with interest.

To clarify, the contract value of the annuity does not actually double or triple. This is just a method used to calculate the monthly LTC benefit. All benefits are tax-free. The underwriting criteria for annuity grids are more open, although they vary depending on the insurance company.

If you have money in an existing annuity or have cash value in a life insurance policy, a 1035 tax-free exchange can be helpful. Here's a quick summary of acceptable 1035 exchanges:

• Life insurance to life insurance 

• Annuity to annuity 

• Life insurance to annuity

This allows you to trade an existing life insurance policy or annuity for a new one with long-term care benefits.

What's great about these plans is they usually have lenient underwriting, and new coverage can be considered through age 80. These benefits may be easier to qualify for than traditional LTC Insurance policies. 

RELATED: Can You Get Long-Term Care Insurance With Pre-Existing Conditions?

Life Insurance Policies with Chronic Illness Riders Do Not Provide Long-Term Care Insurance

Outside of the main three options for hybrid insurance coverage, there's an option often mistaken for a hybrid policy. This is called a chronic illness rider policy, which should be avoided if your goal is to pay for future long-term care needs. 

"Chronic illness" riders, sometimes called "living benefit" riders, are somewhat popular with some insurance agents or financial advisors with limited knowledge of long-term care planning.

They are often misrepresented and misunderstood by the agents and advisors who sell them. A chronic illness rider, on the surface, looks similar to Long-Term Care Insurance riders. However, many of these riders have significant limitations on the benefits they provide for long-term care.

A chronic illness rider only allows you to trigger benefits and access care if you have a chronic or non-recoverable illness or condition. This type of condition is also known as "terminal." 

Depending on the company or policy, chronic illness rider benefit triggers can vary, and some may even be subject to change in the future. Part of the reason for uncertainty with chronic illness riders is due to the fact that they're not legally Long-Term Care Insurance. 

Chronic illness rider policies are regulated under Section 101g as opposed to LTC Insurance, which is regulated under Section 7702(b). Chronic illness rider policies lack the tax benefits, other consumer protections, and regulated benefit triggers that Long-Term Care Insurance provides.

So, what does all of this mean? It means chronic illness riders will only cover care under "terminal" circumstances. Many long-term care situations are not terminal. Other policies may not cover cognitive impairments such as Alzheimer's or dementia, a major reason people may need long-term care.

Many people who purchase these chronic illness rider policies think they have long-term care coverage. However, chronic illness rider policies do not provide the same protections or consumer benefits as traditional Long-Term Care Insurance riders or policies provide.

It's essential to check the policy language and work with a licensed insurance professional when picking out a hybrid policy. You can also tell if it's a chronic illness rider on the printed policy's first page. 

What Should You Look For In A Hybrid Policy?

There are many things to be aware of when it comes to hybrid Long-Term Care Insurance. Here are a few things you should look out for when purchasing a hybrid policy. 

Read the Fine Print With a Long-Term Care Insurance Expert

Buying a hybrid policy is a substantial monetary commitment, although there will be a death benefit in the event you never need long-term care. It's crucial to speak with a licensed long-term care professional to review the benefits and policy language. 

You'll want to look out for how your policy works and how many benefits are in your policy. Here are a few questions you may want to ask: 

• How much of the death benefit could you lose to long-term care?

• Is there a residue death benefit available?

• What percentage of the death benefit is your long-term care benefit based on?

• What are the requirements or standards to access long-term care benefits? 

• Are benefits paid directly to you in cash, or do they go directly to care providers? 

• Is there a limit on how many benefits you can use at once?

• Is there an elimination period or waiting period before benefits kick in? If so, how long is it?

• Do your benefits grow with inflation?

Choose A Linked Benefit Policy Over An LTC Rider Policy

Both the linked benefit and long-term care rider policies offer comprehensive Long-Term Care Insurance. 

A life insurance policy with an extension of benefits may provide more coverage than an LTC rider policy. Since they have two separate pools of money, these policies may cover individuals up to three to five years more than the standard accelerated death benefit would. Policy designs and insurance companies vary, so speak with a specialist to help you decide. 

Hybrid Policies Are Protected By Regulations

True hybrid policies are regulated by 26 U.S. Code § 7702(b). These regulations ensure consumer protections that keep insurance safe but also provide important tax benefits. If you'd like to learn more, you can read our article on Long-Term Care Insurance regulations and how they protect policyholders. 

The long-term care proceeds from any hybrid are tax-free as long as the policy is an actual tax-qualified hybrid policy. Life insurance benefits are also tax-free. With an annuity hybrid, the death benefit (the accumulated value) can be taxable like any annuity, but the long-term care benefits are always tax-free.

The tax deductibility of hybrid policies is different. Most insurance companies will show you which part of the premium is life insurance and which part is long-term care. Only the long-term care portion can be potentially tax deductible or reimbursable by a health savings account (HSA). 

Policies that don't meet these guidelines are not eligible for any tax deductions.

Keep in mind that tax deductions or reimbursements through HSAs are based on the long-term care premium and your age. The only exception is C-corporations, which can deduct any amount for Long-Term Care Insurance. Deductions also have maximums based on your age.

What Are The Available Riders For Hybrid Policies?

In addition to the policy type, there are a few rider options to choose from. Below, we'll list a few popular rider choices.  

• Inflation protection – This rider grows your benefits by a certain percentage each year. It helps your long-term care benefits keep pace with inflation. 

• Interest – Your long-term care benefits grow by a guaranteed interest rate, which could increase but can never drop below the guaranteed rate.

• Shared spousal benefits – There are several insurance companies that offer shared benefits for couples. Each spouse has their own monthly benefit, and together, they share the long-term care benefit pool with a second-to-die death benefit.

• Cash benefit – While not a rider, some hybrid policies provide cash benefits. Unlike most traditional and hybrid policies that will pay up to a maximum amount based on the insurance company receiving a bill for services, cash hybrid policies pay the full amount of the available benefit in cash to the policyholder. A cash policy offers the most flexibility on how you use benefits once you qualify for benefits.

You can meet with a Long-Term Care Insurance specialist to learn more about riders, features, and benefit options for hybrid policies. 

RELATED: What Are Long-Term Care Insurance Riders?  

What Are The Pros & Cons of Hybrid Long-Term Care Insurance?

We’ve covered the different types of hybrid policies, how they function, and what to watch out for when buying a policy. But how do you know if a hybrid is right for you? In this section, we’ll explain a few pros and cons of hybrid Long-Term Care Insurance.  

We’ll start with the positives first:

• Guaranteed premiums – Hybrid policy premiums are locked into a contract. No matter how you choose to pay, you’ll always know exactly how much your premium is, with no risk of increases. It is impossible for a premium increase no matter which premium mode you select.

• Easier to qualify for – Some policies may have more relaxed Long-Term Care Insurance underwriting, making some hybrid policies easier to qualify for than traditional LTC policies. Every insurance company has its own underwriting criteria, and an LTC Insurance specialist can review your health to determine the best option for you.

• Guaranteed benefits – Hybrid policies will provide you or your beneficiaries benefits, whether you live or die. The policyholder will receive long-term care benefits, a death benefit, or even both.

The main selling point of hybrid policies is the guarantee of benefits or the “return of premium” aspect of coverage. You are guaranteed to get your money back, no matter what happens. 

You will have tax-free benefits and services to pay for your choice of quality long-term care services, or your beneficiaries will receive the death benefit from the policy. All this without any concern for future premium increases.

Along with the pros, hybrid policies have some downsides, too:

• Expensive – Compared to traditional LTC Insurance, hybrid policies are far more expensive. This is because you’re paying for two policies at once instead of just one insurance by itself. You are guaranteed to receive benefits from the policy no matter what happens to you. Generally, you are going to get your money back, if not more.

• Fewer tax benefits – Traditional LTC Insurance policies enjoy numerous tax deductions and incentives. Many hybrid policies lack the same level of tax benefits. 

The biggest downside to hybrid policies can be the cost. Many people pay for hybrid policies with a single premium, ranging from $50,000 to $200,000 or more, depending on their age and policy design. 

The cost of your policy will vary depending on how many benefits you choose to add to your policy. The more coverage and benefits you opt for, the more your policy will cost. Older individuals or those with health concerns may also pay more for coverage than younger applicants in great health. 

Often, individuals choose hybrid policies if they have money sitting in a bank account, CD, or money market fund that they really don't need. The money pays for the policy, and the policy pays for long-term care or returned as a death benefit.

Hybrids can be paid over five years, ten years, or even your lifetime. The shorter the period of time, the lower the cost. Keep in mind that if you have cash value in an existing life insurance or annuity, you can use a 1035 tax-free exchange for a hybrid.

Let’s Recap: Hybrid Long-Term Care Insurance Policies Explained

Hybrid policies merge life insurance or annuities and Long-Term Care Insurance together. With this policy, you can easily access long-term care benefits (like any other LTC Insurance policy) and ensure your loved ones get a death benefit after you pass away if you never need long-term care. 

There are several types of hybrid policies, the most notable being linked benefit life insurance or annuity plans, or life insurance with an LTC rider.  

Linked benefit policies offer two separate pools of money under one policy. One pool is for the death benefit, which also offers an accelerated death benefit for long-term care. The other pool of money provides long-term care benefits if the accelerated death benefit money runs out.  

On the other hand, long-term care rider policies only offer an accelerated death benefit to pay for long-term care. These policies don't offer long-term care benefits beyond the accelerated death benefit amount. 

When it comes to hybrid policies, you should look out for policy language. It's not uncommon to mistake a chronic illness rider policy for a legal LTC Insurance rider. It's best to meet with a qualified Long-Term Care Insurance expert to ensure you get the best policy for your needs. 

LTC News wants to help you learn more about long-term care and coverage options. We've picked out a few more articles you may enjoy based on this article.

• Types of Long-Term Care Insurance Policies & Which Is Best For You? - This article compares hybrid policies with traditional Long-Term Care Insurance policies. You can learn how they differ and when one policy might make more sense. 

• How Does Long-Term Care Insurance Differ From Other Types of Insurance? - This article explains how Long-Term Care Insurance differs from other types of coverage. Some compared coverage options include hybrids, short-term, and disability insurance.