Many life insurance products could be classified as “unitaskers”—meaning they essentially have a single purpose. However, one insurance product defies the unitasker status and epitomizes the idea of flexibility—hybrid life insurance—which combines both life insurance and long-term care (LTC) insurance into a single policy.
To help address any questions you may have—or to provide an overview of these policies if this is the first time you’ve heard about them—here are the key things you should know before purchasing a hybrid policy.
Hybrid Life Insurance: A Quick Overview
One of the biggest complaints people have about traditional LTC coverage is that if they end up never needing that long-term care, they feel like they’ve essentially wasted the money they spent on premiums. A hybrid policy addresses that criticism by combining a permanent life insurance element alongside the LTC protection.
Here’s how it works: Imagine you purchase a hybrid policy with $200,000 in benefits. If you die without needing any LTC, that death benefit will be paid out to your beneficiaries. However, if you end up needing care, you can transform the death benefits in your hybrid policy into cash to pay for your LTC medical expenses, thereby reducing the amount of death benefits that may be left to your beneficiaries.
Two Potential Downsides to a Hybrid Life Insurance Policy
The flexibility and the essential guarantee that you’ll receive a benefit from the policy one way or the other are certainly powerful advantages that make hybrid policies attractive options. These policies, however, do have disadvantages that you need to consider in relation to your overall financial plan.
1. Less Benefits for Your Hybrid Policy Premiums
You’re probably going to get less "bang" in benefits from the bucks you spend on premiums. Imagine you’re going to spend $X in premiums on life insurance or LTC insurance. The amount of benefits you receive for that amount paid in premiums is likely to be higher than what you would receive from a hybrid policy at the same cost. For the same premium amount for either a life insurance or LTC policy, you would likely get a higher benefit, but you would need to buy both in order to have the same coverage of a hybrid policy. Essentially, in exchange for the flexibility of a hybrid policy, you generally end up paying a higher premium. So, while a hybrid policy is good at accomplishing different things, there are likely going to be more cost-efficient LTC and life insurance policies on the market.
2. Hybrid Policies Do Not Qualify for State Partnership Programs
These hybrid policies generally do not qualify for programs like the Minnesota LTC Partnership. Depending on your financial situation, this could be a downside because only traditional LTC policies qualify. In the Minnesota LTC Partnership example, if you have $100,000 of traditional LTC coverage, you use all that up, and the state has to go to your assets to cover the rest of the medical bills, then the state will spend down your assets but protect the amount of assets that were covered by LTC. In this example, the state would spend down all the assets except $100,000. Although this example is for Minnesota residents, most states have signed their own LTC partnership programs into law. These programs vary with their own spend down guidelines, but the asset protection from the use of traditional LTC is the same.
Choosing the Right Life Insurance Policy for You
As they become better known, hybrid policies are an increasingly popular option. While there are some great benefits that hybrid policies provide, it’s important to weigh the costs against those benefits before ultimately deciding if a hybrid policy is right for you and your family.
When it comes to finding a policy to fit your needs, how much life insurance you need, and when to purchase a policy, your advisor can help you consider your options. Your Wealth Enhancement Group advisor will take your entire financial life into account, including looking at your potential need for long-term care later in life and determining how life insurance fits into your overall estate plan.
This article contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, please contact your insurance agent. State insurance laws and insurance underwriting rules may affect available coverage and costs. Guarantees are based on the claims paying ability of the issuing company.
CFP®, Series 7, 24 & 63 Securities Registrations,1 Insurance License Jennie, a CERTIFIED FINANCIAL PLANNER™ professional, joined Wealth Enhancement Group in August 2009 and brings more than 16 years of experience to her role as Senior Vice President, Financial Advisor. Jennie is also a member of the Roundtable—the team of specialists and advisors who have distinct areas of expertise. Jennie’s knowledge of wealth management strategies makes her...Read More