Hybrid Long Term Care
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Tom Hanks, "Big", Netflix
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Are "hybrid" LTC policies with a death benefit really a better deal?
You'll be surprised at what our analysis shows, and why you need to make sure you know ALL your options before you buy LTC insurance.
When looking at hybrid LTC options I feel like Tom Hank's character in "Big" trying to figure out the appeal of an office building-to-robot transformer toy: "I don't get it."
Is there really a huge advantage to hybrid LTC insurance vs. traditional LTCI? Or is it just marketing hype playing on clients' misplaced fears of spending premiums dollars that they may never get back? In this example we compare a single-premium life insurance-linked hybrid LTCI policy with an equal-LTC benefit traditional LTCI policy.
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A recently hyped Hybrid Life + LTCI example:
Traditional LTC Insurance:
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Assumptions: Very low interest rate AND excessive rate increases
In this analysis, when buying Traditional LTCI (T-LTCI) the $250,000 that is not spent as a hybrid single-premium is retained as cash savings by the couple.
Key assumptions:
("Long-Term Care Insurance: The SOA Pricing Project", Nov. 2016)
Key assumptions:
- The savings account earns interest at only 1% & T-LTCI premiums are paid from the cash account.
- The T-LTCI has a 30% rate increase after year 5 and another 20% after year 10 - that's a total increase of 56%.
("Long-Term Care Insurance: The SOA Pricing Project", Nov. 2016)
SCENARIO ONE: No LTC Claims - both spouses die by age 90
- Hybrid DB = $381,000 to heirs. $250,000 premium returned plus $131,000 net DB.*
- T-LTCI "DB" = $102,000 balance of savings to heirs after LTC premiums paid.*
Hybrid wins! (But...)
Hybrid LTCI wins in this one example, but with a dramatic loss of liquidity during retirement. What if additional liquid cash were needed along the way? What is the impact of needing emergency funds or for a large expense like a new car in the middle of a 20%-40% market correction as we're experiencing now?
At age 70 with the T-LTCI plan plus retained savings, the couple still has full control of $207,000 in cash ($153,000 at age 80), and even if used for other emergency or lifestyle expenses, they are able to continue their LTC coverage with on-going premiums. With this hybrid example, even though there is a guaranteed return of the full $250,000 premium paid, by surrendering their cash value they lose their insurance coverage - both life and LTCI.
The chance of both spouses dying without any LTC need for either is very, very small. Is the goal planning for death or planning for care?
SCENARIO TWO: LTC Claim for Two Years (at age 82) - highly likely
- Hybrid LTC benefits paid = $185,000. Remaining DB = $196,000. Total benefits paid = $381,000. Cost = $250,000. Net value of benefits after premium = $131,000.*
- T-LTCI LTC benefits paid = $185,000. Remaining cash "DB" = $148,000. Total benefits = $333,000. Cost = $185,000. Net value of benefits after premium = $148,000.
Traditional LTCI wins! (Barely, but...)
Because a hybrid LTC claim consumes the death benefit (and cash value) first, even a short claim wipes out the hybrid's "death advantage." And while the T-LTCI plan effectively just pays back the premiums paid, the retained cash account and lower total premium cost delivers $17,000 more total net benefits to the family.
In addition, and more importantly, the cash account remains fully liquid and available during the claim for any extra expenses that may be incurred or to protect the portfolio further if care is needed during another bear market. There is no additional access to the hybrid's cash value during a LTC claim.
SCENARIO THREE: LTC Claim for Four Years (at age 82) - average claim
This should be the primary focus as a mid-point example for any extended care plan.
Traditional LTCI wins BIG!
T-LTCI delivers $205,000 more total net benefits to the family, and, again, the cash account remains fully liquid and available during the claim for any extra expenses - basic living or additional care expenses not covered by the LTC insurance - or as a critical buffer during a bear market. For an average claim for one spouse or a small 1-3 year claim for both, hybrid becomes, "Use it AND lose it"!
- Hybrid LTC benefits paid = $370,000. Remaining DB - $11,000. Total benefits paid = $381,000. Cost = $250,000. Net value of benefits after premium = $131,000.*
- T-LTCI LTC benefits paid = $370,000. Remaining cash "DB" = $151,000. Total benefits = $521,000. Cost = $185,000. Net value of benefits after premium = $336,000.*
Traditional LTCI wins BIG!
T-LTCI delivers $205,000 more total net benefits to the family, and, again, the cash account remains fully liquid and available during the claim for any extra expenses - basic living or additional care expenses not covered by the LTC insurance - or as a critical buffer during a bear market. For an average claim for one spouse or a small 1-3 year claim for both, hybrid becomes, "Use it AND lose it"!
SCENARIO FOUR: Max LTC Claim for Eight Years (at age 82) - dementia worry
- Hybrid LTC benefits paid = $739,000. Remaining DB - $0. Total benefits paid = $739,000. Cost = $250,000. Net value of benefits after premium = $489,000.*
- T-LTCI LTC benefits paid = $739,000. Remaining cash "DB" = $157,000. Total benefits = $896,000. Cost = $185,000. Net value of benefits after premium = $711,000.*
Traditional LTCI wins BIGGER!
T-LTCI delivers $222,000 more total net benefits to the family, and, again, the cash account remains fully liquid and available during the claim for any extra expenses - basic living or additional care expenses not covered by the LTC insurance - or as a buffer during a bear market. For a catastrophic claim, once again, hybrid is, "Use it AND lose it"!
What if you earn more than 1% with no rate increase?
If you earn 3% on your cash account with NO T-LTCI premium increases, using the 4-year average LTC claim from Scenario Three above:
Traditional LTC insurance delivers $412,000 MORE total net benefits than the hybrid plan with an average claim in this best-case example.
In conclusion, the ONLY way single-pay Hybrid LTCI wins in this example is if both spouses die with neither one needing any long-term care - not likely with a 2nd-to-die death benefit - and this comes with a dramatic loss of liquidity during retirement. If either spouse - or both in combination - use two years or more of LTC insurance benefits, the Hybrid LTC plan in all of the LTC claim scenarios pays LESS net benefits to the family, even assuming a minimal interest rate and excessive premium increases on the Traditional LTCI.
- Hybrid LTC benefits paid = $370,000. Remaining DB - $11,000. Total benefits paid = $381,000. Cost = $250,000. Net value of benefits after premium = $131,000.*
- T-LTCI LTC benefits paid = $370,000. Remaining cash "DB" = $307,000. Total benefits = $677,000. Cost = $134,000. Net value of benefits after premium = $543,000.*
Traditional LTC insurance delivers $412,000 MORE total net benefits than the hybrid plan with an average claim in this best-case example.
In conclusion, the ONLY way single-pay Hybrid LTCI wins in this example is if both spouses die with neither one needing any long-term care - not likely with a 2nd-to-die death benefit - and this comes with a dramatic loss of liquidity during retirement. If either spouse - or both in combination - use two years or more of LTC insurance benefits, the Hybrid LTC plan in all of the LTC claim scenarios pays LESS net benefits to the family, even assuming a minimal interest rate and excessive premium increases on the Traditional LTCI.
NEXT - An Apples To Apples Comparison:
Hybrid LTCI with a
guaranteed, annual, pay-as-you-go premium
vs. Traditional LTCI
* All numbers rounded to the closest $1000. For illustrative/comparative purposes only. Interest rate assumptions and future premium increases are hypothetical; actual experience would be different. LTC policy costs and benefits are determined by an issued policy. Not all plans, benefits or features may be available in every state. Contact a licensed agent for state-available, personalized quotes and an outline of coverage for the plan(s) being considered including any limitations and exclusions.
by Bill Comfort, CSA, CLTC, LTCCP
April 14, 2020
April 14, 2020
