Linked-benefit may also be called "hybrid", "combo" or "asset-based" LTC insurance - there is no standard definition of these terms
What is Linked-Benefit LTC Insurance?
The "new kind" of LTC insurance is known as a "linked-benefit" LTC insurance policy. (It's actually been around since the late 1980s but has only recently become more popular.)
Simply, it combines - or links - LTC insurance benefits with another type of insurance like life insurance or an annuity. It provides a pool of money to pay for long-term care expenses, but if you never need care your heirs receive a life insurance death benefit or the cash value from an annuity.
"What if I never need long-term care?
This is a common objection to buying LTC insurance, and a linked-benefit LTC insurance policy may be the answer. But recognize that the additional benefits (a death benefit or cash value refund if no care is needed and guaranteed premiums) add additional costs. Here are some examples:
Life insurance with an extended LTC insurance benefit pool
This is the most common type of hybrid or linked-benefit LTC insurance. In addition to letting a policyholder use up or "accelerate" the death benefit to pay for long-term care, there is an additional, "extended" LTC benefit, or an extra "bucket" of LTC money that continues the LTC benefits past the exhaustion of the base policy's death benefit. If care is never needed, there is a death benefit, and typically the policy also guarantees a 50% to 100% return of your premium if you decide to cancel the policy.
These policies are designed to maximize the LTC benefit and should be used when the primary planning need is for long-term care funding.
Premiums are typically paid as a single lump-sum, or spread out over 10 to 15 years. There are now new options that have an annual, pay-as-you-go premium for life. True linked-benefit plans with extended LTC coverage have guaranteed premiums - an advantage versus "traditional" LTC insurance.
EXAMPLE - 60-year-old married woman:
A $70,000 single premium may create a $120,000 death benefit and a $360,000 total LTC benefit. If a 6-year benefit option is chosen, the policy would provide $5,000 per month for long-term care expenses with no increase for inflation. (To add an automatic 3% compound benefit inflation increase, the premium would be $106,000.)
Built-in benefit increases for inflation are available as an option, but are often not quoted. It is very important to properly compare the actual costs of these plans when comparing to a traditional LTC insurance policy that does automatically increase for the rising cost of care.
A life Insurance + extended LTC benefits policy may be easier to qualify for medically than a traditional LTC insurance policy, especially if a couple buys a plan jointly. This is because the primary underwriting criteria is based on the life insurance policy that pays LTC benefits for the first two to three years. Plans with a single, up-front premium may offer easier underwriting because the company gets to keep a large amount of your money from day one.
Apples-to-apples, these plans cost much more than traditional LTC insurance because you're also buying a life insurance death benefit, accumulating cash value, and guaranteed premiums.
Be careful to properly analyze the cost of these plans, especially when comparing a single-premium to a pay-as-you-go traditional LTC policy. You must consider what you would earn on the single premium if you kept it in your own savings/investment account.
Life insurance that lets you use the death benefit for LTC
Many insurance companies are only adding a LTC insurance "rider" to their traditional life insurance policies. The LTC rider is a type of "accelerated death benefit" (ADB) and simply makes the death benefit available for long-term care expenses at a set percent of the death benefit each month; there is no additional money for long-term care beyond the death benefit.
This type of policy is recommended for people who primarily need life insurance, but want some LTC coverage just in case. A simple accelerated death benefit for LTC is usually NOT the preferred or best way to fund for long-term care.
These ADB for LTC riders may have easier underwriting than the extended-LTC-benefit plan noted above because there is less consideration of the "disability" (LTC) risk.
A life insurance policy with a $250,000 death benefit and a 2% LTC benefit rider would provide $5,000 per month ($250,000 x 2%) for a total of 50 months.
Inflation increases are not available; the benefit is fixed. Premiums may or may not be guaranteed depending on the type of life insurance - this is critically important to understand as LTC insurance must be kept in-force into very old age.
Some companies offer a similar "chronic illness" rider which is not qualified LTC insurance, and cannot be sold as "LTC insurance", though it is very similar. The benefit triggers may be more restrictive than a qualified LTC insurance rider, and the "chronic illness" benefits may not be guaranteed as typically they are calculated at the time of claim.
These ADB for LTC riders are most appropriate for people with a primary need for life insurance and want a low-cost option to keep the coverage for long-term care needs as life-priorities change. These are also an option for people with more complicated medical histories due to a more life insurance focused underwriting process.
Deferred annuity with qualified-LTC benefits
This is a great option to use if you have an existing annuity with substantial taxable "gains" (interest/investment increases) that can be rolled over tax-free into a new annuity with LTC benefits. You still have your annuity cash value to use in all the ways an annuity can provide income or survivor benefits, but thanks to the Pension Protection Act of 2006, if the LTC-qualified annuity pays for care, the cash values - including the gains and any additional LTC benefits - are received income tax-free!
There are plans available up to age 90 with essentially no underwriting because there is no "extra" coverage beyond your own annuity cash value, but this can be a great way to convert taxable annuity funds into tax-free money if used for long-term care.
Other types of LTC annuities provide extended LTC benefits after your cash value is used first. A common approach is to double or triple your cash value for LTC.
$100,000 premium paid into the annuity produces $300,000 of total LTC benefits. (Note that $100,000 of these benefits are simply the return of your own cash value.) The LTC benefit may be paid out over a 3 or 4 year benefit period. $300,000 divided by 4 years would provide $6,250 per month for long-term care.
These multiplier LTC annuities typically do not include inflation increases. There are very few of these on the market today because interest rates are so low. The internal "cost" of the extra benefits for LTC is taken from the interest earnings, so an annuity earning 2% may actually only produce less than 1% in actual cash earnings after the LTC insurance charges are deducted - the LTC benefit is never "free", especially if it extends LTC payments after the basic cash value is paid out first.
The 3-year "Elimination Period" Plan:
A variation requires you to use all your own annuity money first, over three years, but then you can have an extended unlimited LTC insurance benefit kick in after. This type of annuity-LTC plan does require an extra premium to be paid for the benefit extension, but it's much lower than "normal" because of the long EP "deductible". And because you are "self-funding" the first three-years from your own money, the LTC underwriting is dramatically reduced. You can even fund the base annuity with qualified retirement funds (e.g., from an IRA).
LTC-qualified annuities can turn taxable gains into tax-free benefits when used for long-term care!
NOTE that no linked-benefit LTC policy qualifies for