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.
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 premium dollars that they may never get back?
This case study has the same LTC benefits as the previous (Part 2) single-pay hybrid LTC insurance vs. life-pay traditional LTC insurance, but in this example, BOTH plans are designed with annual, lifetime, pay-as-you-go premiums.
There is NO scenario here where this life-pay hybrid LTC insurance is a better deal than a traditional LTCI plan.
There is NO scenario here where this life-pay hybrid LTC insurance is a better deal than a traditional LTCI plan.
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Hybrid Life + LTC Insurance:
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 annual difference in premium compared to the hybrid premium ($9,200/year starting difference) is committed to cash savings by the couple - think "buy term and invest the difference."
Key assumptions:
("Long-Term Care Insurance: The SOA Pricing Project", Nov. 2016)
NOTE that the T-LTCI plan would need a 150% rate increase (x2.5) to equal the hybrid plan's annual premium.
Key assumptions:
- The savings account earns interest at only 1%.
- 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)
NOTE that the T-LTCI plan would need a 150% rate increase (x2.5) to equal the hybrid plan's annual premium.
SCENARIO ONE: No LTC Claims - both spouses die by age 90
- Hybrid DB = $385,000 to heirs. Total premiums paid: $437,000. Net DB = -$79,000.*
- T-LTCI "DB" = $102,000 balance of savings account to heirs after LTC premiums paid.*
Split decision depending on how you want to count your money ...
Yes, the heirs get more money from the Hybrid LTC death benefit. But the net cost during retirement is a terrible deal - if you never need care you grossly over-paid for both your LTC coverage AND your life insurance. The death benefit does not even return the total of premiums paid.
Also consider these walk-away cash values:
Age 70:
- Hybrid = $ 59,000
- T-LTCI = $207,000
- Hybrid = $197,000
- T-LTCI = $143,000
Like with the previous single-pay example, the only scenario where hybrid LTCI has an advantage is if both spouses die never needing care - which is very unlikely with a 2nd-to-die life insurance structure - or if they surrender the plan very late in life, but this benefit comes at a very high cost.
NOTE that this same couple can buy $381,000 of separate 2nd-to-die life insurance with a guaranteed premium of only $5,100/year.*
"But the hybrid premiums are guaranteed!"
Question: Is it worth spending 2.5x MORE from day one to guarantee your premiums against a rate increase that not only is unlikely to happen, but even if it does at FIVE-TIMES the actuarial-estimated potential your family still effectively loses $181,000 with the hybrid LTCI plan?!
SCENARIO TWO: LTC Claim for Two Years (at age 82) - highly likely
- Hybrid LTC benefits paid = $185,000. Remaining DB = $200,000. Total benefits paid = $385,000. Cost = $328,000. Net value of benefits after premium = $57,000.*
- T-LTCI LTC benefits paid = $185,000. Cash savings "DB" = $152,000. Total benefits = $337,000. Cost = $185,000. Net value of benefits after premium = $152,000.*
Traditional LTCI wins!
Because a hybrid LTC claim consumes the death benefit (and cash value) first, even a short claim erases any potential advantage. And while the T-LTCI plan effectively just pays back the premiums paid, the difference in annual premiums saved in the cash account plus the lower annual premium cost delivers $95,000 more total net benefits to the family.
In addition, and more importantly, the cash savings 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 $283,000 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, this pay-as-you-go hybrid plan has no advantage over the traditional plan with excessive rate increases and minimal interest earnings on the premium difference.
- Hybrid LTC benefits paid = $370,000. Remaining DB - $15,000. Total benefits paid = $385,000. Cost = $328,000. Net value of benefits after premium = $57,000.*
- T-LTCI LTC benefits paid = $370,000. Cash savings "DB" = $155,000. Total benefits = $525,000. Cost = $185,000. Net value of benefits after premium = $340,000.*
Traditional LTCI wins BIG!
T-LTCI delivers $283,000 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, this pay-as-you-go hybrid plan has no advantage over the traditional plan with excessive rate increases and minimal interest earnings on the premium difference.
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 = $328,000. Net value of benefits after premium = $411,000.*
- T-LTCI LTC benefits paid = $739,000. Cash savings "DB" = $161,000. Total benefits = $900,000. Cost = $185,000. Net value of benefits after premium = $715,000.*
Traditional LTCI wins BIGGER!
T-LTCI delivers $304,000 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 has no advantage.
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 $525,000 - a half-million dollars - MORE total net benefits than the hybrid plan with an average claim in this best-case projection.
In conclusion, the Hybrid LTC plan's ONLY advantage is it has a guaranteed premium, and then only "wins" with two deaths and no LTC claims. But at 2.5-times the starting premium of an equal Traditional LTC policy, there is NO net advantage to Hybrid LTCI in any of our scenarios, even if you die never needing care.
- Hybrid LTC benefits paid = $370,000. Remaining DB - $15,000. Total benefits paid = $385,000. Cost = $328,000. Net value of benefits after premium = $57,000.*
- T-LTCI LTC benefits paid = $370,000. Cash savings "DB" = $346,000. Total benefits = $716,000. Cost = $134,000. Net value of benefits after premium = $582,000.*
Traditional LTC insurance delivers $525,000 - a half-million dollars - MORE total net benefits than the hybrid plan with an average claim in this best-case projection.
In conclusion, the Hybrid LTC plan's ONLY advantage is it has a guaranteed premium, and then only "wins" with two deaths and no LTC claims. But at 2.5-times the starting premium of an equal Traditional LTC policy, there is NO net advantage to Hybrid LTCI in any of our scenarios, even if you die never needing care.
Check back soon for our next case study analysis
comparing hybrid vs. traditional long term care insurance
plans in Part 4 of our series ...
* 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 15, 2020
April 15, 2020
