Should I consider Hybrid/Combination Long Term Care Insurance Policies?

The need for long term care insurance is not going away. It is estimated that more than half of today’s 65 year olds will require long-term care at some point, at an average annual cost of $183,000. Most people will only need care for less than two years, however one in seven will face more than 5 years of disability. Medicare covers only short stints in a nursing facility. Medicaid can fill the gap, but only after you’ve depleted most of your assets. Long term care insurance is recommended to cover home care, assisted living or nursing home care.

As I’ve written about previously, the individual long term care insurance marketplace has significant issues. There are few insurance companies currently offering individual long term care insurance. And on long term care insurance policies issued prior to the implementation by State Insurance Departments of the National Association of Insurance Commissioners Model Rate Stabilization Act, there have significant premium increases due to multiple issues. For more read my article: Can Long-Term Care Insurance Survive?

In a number of recent articles, the subject of hybrid (combination) long term care insurance policies have come up and as always, these should be approached with caution. A primary concern is that premiums have to be paid in a lump sum rather over a period of years. This may be fine if there is no claim for twenty years, however, if there is a claim after a year or two, you would have significantly overpaid with a lump sum premium. Life insurance based products are the only insurance products that even allow a lump sum premium (ignoring annuities here).

Hybrid LTC policies have other issues, including the fact that LTC pricing component is not covered by LTC Rate Stabilization Rules, so insurance companies have freedom to change components of the policies on an opaque financial products. On a stand-alone LTC product, insurance companies, in most states must seek approval for rate increases on a transparent basis. The other issue with hybrids is they combine two types of polices that have not worked on their own – universal life and long term care – how can you combine two products that have issues and come up with a product that works? Two wrongs do not equal a right.

A note on universal life policies, much has been written on the impact of lower than anticipated credited interest rates and increased mortality costs causing almost every universal life insurance policy written in the 1980’s and 1990’s to project to terminate well before anticipated. Policy owners are faced with either paying a higher premium or having their coverage terminate.

Bottom line, hybrid/combination policies are something to stay away from….

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