As standalone long-term care insurance becomes more expensive and harder to find, more consumers are turning to hybrid life insurance policies, which combine life insurance and long-term care coverage. These plans are called combination life insurance.
The hybrid policies are permanent life insurance policies with a long-term care rider. They often appeal to cost-conscious consumers who need both types of coverage and want to avoid paying separately for both a long-term care policy and a life insurance policy.
Whether a long-term care insurance or a combination life insurance policy is best depends on what you want from your policy. Consider these five questions to determine whether or not a hybrid policy will meet your needs.
1. When are combination life insurance policies a good fit?
Hybrid policies tend to have the greatest appeal for consumers in their late-40s to early-70s, who are concerned about incurring hefty long-term care costs, says Neal Kerins, assistant vice president of insurance product management at John Hancock Insurance.
"The last thing people want to do is be dependent on family members for their care," Kerins says.
At the same time, people who may like combination life insurance are those who to leave an inheritance for their loved ones when they die.
If you're interested in a hybrid life insurance policy, you typically need to make that decision when you purchase life insurance. It usually isn't possible to add a long-term care rider later, according to Kerins.
2. How much can you save on insurance?
A hybrid policy generally costs about 5% to 15% more than a standalone life insurance policy, depending on the company you choose. You can expect to pay at least $75,000 in a lump sum to add long-term care coverage to your permanent life insurance.
Of course, the cost of life insurance varies, and the price you'll pay is much lower if you buy it when you're young and healthy.
In comparison, a standalone long-term care policy can cost $2,500 to $3,500 (or more) a year. Long-term care insurance rates have gone up over the past decade as dozens of life insurers dropped out of that market and fewer people have signed up.
3. How do I qualify for a hybrid life insurance policy?
Like a standalone life insurance policy or long-term care policy, you'll typically need to undergo a medical exam to make sure you qualify for a hybrid policy. According to the Texas Department of Insurance, insurers may request copies of your medical records, might require a statement from your physician and are likely to ask you to complete a health survey.
If you opt for a combination life policy, the long-term care provision provides assistance if you suffer an illness or injury and need help doing things that you used to be able to do on your own.
The insurance benefit kicks in when you can't perform two of the six "activities of daily life." Those activities include:
- Bathing yourself
- Dressing yourself
- Going to the bathroom on your own
- Feeding yourself
- Moving from a chair or bed without assistance
"It ends up being a living benefit of a life insurance policy," says Frank Chechel, second vice president of life product management at The Guardian Life Insurance Co. of America.
If you are injured or become ill and need assistance, you'll typically have to wait a certain period of time, such as 90 days, before your long-term care coverage takes effect.
Should you need long-term care, you can receive assistance at home, in an adult day-care center, in an assisted-living facility, or in a nursing home. Most long-term care claims are for in-home care.
4. Do I need life insurance and long-term care coverage?
Many people want to protect their loved ones from financial distress in the event of their death, and also want to avoid being a burden to their family should they become unable to care for themselves.
If you have a combination life insurance policy and don't use the long-term care benefit, your heirs receive the value of your life insurance policy -- such as $250,000 or $500,000 or $1 million -- when you die.
If you do need long-term care, the death benefit is accelerated. That means you receive a portion of the face value of the policy each month. With John Hancock, you can receive up to 4% of the death benefit each month, Kerins explains.
5. What are some of the pros and cons of combination life insurance?
One downside can occur when you need long-term care for an extended period of time. You could eventually zero out your policy and have nothing left to leave for your heirs, Chechel cautions.
However, with some policies, you may be able to draw down your entire benefit, while the policy still pays out a small amount to your loved ones when you die, such as $10,000 or $25,000, according to Chechel.
For example, with Nationwide's long-term care rider, you can manage long-term care expenses and use excess funds any way you wish. And you will still be able to leave an inheritance if the rider benefits are not needed or completely utilized. Nationwide's plan is set up so beneficiaries receive the greater of an unused long-term care benefits or 10% of the policy's specified amount due to a guaranteed death benefit.
Standalone long-term care policies are generally much more expensive, but they also tend to be more flexible and have more options to choose from than a hybrid policy, Kerins explains.
Some of the coverage with hybrid policies is limited, warns Leonard Wright, a San Diego CPA. For example, assisted living benefits may be limited to a percentage of the cost of nursing home care, such as 60% to 75%. Some policies also exclude mental and nervous conditions, which can be common for senior citizens.
Research before you buy
If you don't have dependents, or if you have assets that your dependents can rely upon, you may need little to no life insurance. If you don't need to have life insurance coverage, Kerins recommends opting for a standalone long-term care policy.
Depending upon your personal risk factors, such as life expectancy, gender (women often live longer than men), your family circumstances and health history, your may be more or less likely to require long-term care.
Wright recommends requesting a sample policy so you can read through it and understand the details of the long-term care provisions. It's also important to know what will happen to the cash value of the policy if you need long-term care.
If you can afford it, you may be better off with a separate life insurance policy and long-term care policy. But a hybrid policy may be ideal for those who need to minimize insurance premiums.
"A customer has to really evaluate what their personal needs are," explains Kerins.
In the final analysis, whether a combination life insurance policy or long-term care insurance is right for you depends on what you want from your policy, your finances and your situation.