"Keep Your Cash"
How to design LTC Insurance
to pay for CARE
AND keep your cash liquid
A single-pay example
A common marketing myth about "hybrid"
(or "linked-benefit" or "asset based")
LTC insurance is that
the policy's cash value is "liquid."
It may be "guaranteed," but it is NOT "liquid."
Most Hybrid LTC insurance policies guarantee cash values at 70% to 100% of your premiums paid, especially when purchased with a single, lump-sum premium.*
The marketing "pitch" is this:
"How can you lose if your cash value equal to your premium - or most of it - is guaranteed?!"
The reality is: If you take back your cash value, you lose your insurance coverage - both the LTC and life insurance!
The very concept of liquidity in sound financial planning is to keep your cash available for emergencies or other major expenses WITHOUT risk:
The marketing "pitch" is this:
"How can you lose if your cash value equal to your premium - or most of it - is guaranteed?!"
The reality is: If you take back your cash value, you lose your insurance coverage - both the LTC and life insurance!
The very concept of liquidity in sound financial planning is to keep your cash available for emergencies or other major expenses WITHOUT risk:
- No loss of value in a bear market or sudden market crash.
- No tax consequences.
- No withdrawal penalties or surrender charges.
- No loss of other benefits.
Some Hybrid LTC plans allow you to take a "partial withdrawal" or take a loan against your cash value. This is promoted as on-going "liquidity." But the fine print says any cash value loans or partial withdrawals will reduce your policy's coverages - LTC and death benefit - by a proportionate amount.*
QUESTION:
Hybrid LTC vs. "Use it or lose it"
The Hybrid LTC marketing myth that your cash value remains "liquid" is tied to another false premise: That "Traditional" LTC insurance is a "use it or lose it" proposition. In other words:
"Why pay premiums for years and years and if you never need care you've 'wasted' all that money? With hybrid LTC you get your money back no matter what!"
"Frozen" Money - Lots of it
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While getting your money back appears to be a great idea, the whole premise falls apart when you COMPARE how much money you have to "freeze" just to get it back versus a plan to Keep Your Cash and pay a much smaller premium for "pure" LTC insurance. Hybrid LTC's "extra" benefits are not "free."
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Here is a common single-pay Hybrid LTC example compared to a "Keep Your Cash" + Traditional LTC plan:
- 60 Year Old Couple - Good "Standard/Non-Smoker" Health
- $5,000/month starting LTC benefits for each
- 3% compound automatic LTC benefit inflation increases
- Four-year maximum benefit period for each WITH "shared benefits"
- Single-premium "cost of money" & interest earned on the "Keep Your Cash" account = 4%*
- Traditional LTC premiums paid out of the "Keep Your Cash" account
- Hybrid death benefit not paid until the 2nd spouse dies
- Premiums, CV and DB averaged from two Hybrid LTCI policies & three Traditional LTCI policies*
PLAN DESIGN: |
HYBRID LIFE+LTC |
"KEEP YOUR CASH" + TRADITIONAL LTC |
PREMIUMS: |
- $219,692* (Surrender Value year 5: $101,796*) |
- $10,055 per year* (Liquid cash year 5 = $212,602)* |
LIQUID CASH AT AGE 70: |
$0 (CV: $120,638) |
$199,647* |
LIQUID CASH AT AGE 75: |
$0 (CV: $143,403) |
$189,153* |
TOTAL DEATH BENEFITS AT AGE 80: |
$258,000 (CV@80 = 168,159) |
$173,494 (cash)* |
TOTAL PREMIUM COST BY AGE 80: |
- $462,858* (NET cost w/DB = - $204,858)* |
- $201,100* (NET cost w/"DB" = - $27,606)* |
LTC BENEFITS PAID FOR 4-YEAR CLAIM ON ONE SPOUSE FROM AGES 80-84: |
$528,193 |
$528,193 |
DEATH BENEFIT REMAINING AFTER ONE 4-YEAR LTC CLAIM: |
$10,800* |
$191,201* (cash to heirs) |
NET BENEFITS AFTER PREMIUM COSTS & 4-YEAR LTC CLAIM: |
$76,135* |
$518,294* |
*Hypothetical, for illustrative, comparative, educational purposes only. T-LTCI premiums are designed and assumed to remain level, but are not guaranteed. Hybrid LTC premiums and benefits are guaranteed.
If you need care, Hybrid LTC is "use it AND lose it"!
Plan for CARE!
The ONLY time hybrid wins in an example like this is if both spouse die never needing care. Even then, the Hybrid LTC death benefit is very expensive life insurance. When you consider all the lost interest earnings on the lump-sum premium payment, the Hybrid LTC death benefit, as shown in the example above, does not even return the true cost of your premiums paid!
AND buying Traditional LTC still has a Keep Your Cash "death benefit" - in fact, the NET death benefit is HIGHER with Traditional LTC coverage with or without needing care!
Hybrid LTC is also the most-expensive LTC insurance you can buy. Any claim lasting longer than a couple years uses up all your cash value and death benefits first (except for a small residual amount depending on the plan). In that regard, hybrid LTCI is "use it AND lose it"!
The ONLY time hybrid wins in an example like this is if both spouse die never needing care. Even then, the Hybrid LTC death benefit is very expensive life insurance. When you consider all the lost interest earnings on the lump-sum premium payment, the Hybrid LTC death benefit, as shown in the example above, does not even return the true cost of your premiums paid!
AND buying Traditional LTC still has a Keep Your Cash "death benefit" - in fact, the NET death benefit is HIGHER with Traditional LTC coverage with or without needing care!
Hybrid LTC is also the most-expensive LTC insurance you can buy. Any claim lasting longer than a couple years uses up all your cash value and death benefits first (except for a small residual amount depending on the plan). In that regard, hybrid LTCI is "use it AND lose it"!
Keep Your Cash + Traditional LTC returns almost SEVEN-TIMES
more net value to the family even with a four-year LTC claim!
(We could argue endlessly over whether you can really earn 4% "in the bank" or anywhere else on your "safe" money. Should it be a 4% or 1% or 7% interest/cost of money rate? You tell us! If you request a consultation we will use whatever assumptions you want! )
Keep the bigger picture in mind: "Freezing" your liquid cash in a Hybrid LTC policy throughout retirement is poor financial planning for most people, and most "fiduciary" financial planners look at your entire diversified portfolio's earnings to determine appropriate projections on ALL your savings and investments.
Consider this: What if you had a significant out-of-pocket emergency expense at age 75? With the "Keep Your Cash" strategy you have $189,153* available in LIQUID assets to help pay for it without having to surrender any LTC coverage. Or if you need care at age 80, with "Keep Your Cash" you have BOTH your LTC insurance benefits AND the additional $173,494* in cash that can supplement your insurance coverage for care expenses!
Why would you "freeze" your emergency, liquid cash when you can Keep Your Cash liquid and available for any unexpected expenses or emergencies along the way AND still have LTC coverage too?!
Don't buy the hybrid hype. Keep your cash!
Keep the bigger picture in mind: "Freezing" your liquid cash in a Hybrid LTC policy throughout retirement is poor financial planning for most people, and most "fiduciary" financial planners look at your entire diversified portfolio's earnings to determine appropriate projections on ALL your savings and investments.
Consider this: What if you had a significant out-of-pocket emergency expense at age 75? With the "Keep Your Cash" strategy you have $189,153* available in LIQUID assets to help pay for it without having to surrender any LTC coverage. Or if you need care at age 80, with "Keep Your Cash" you have BOTH your LTC insurance benefits AND the additional $173,494* in cash that can supplement your insurance coverage for care expenses!
Why would you "freeze" your emergency, liquid cash when you can Keep Your Cash liquid and available for any unexpected expenses or emergencies along the way AND still have LTC coverage too?!
Don't buy the hybrid hype. Keep your cash!
"But what about premium rate increases?"
Yes, most Hybrid LTC plans designed for LTC planning have guaranteed premiums - whether a single-pay, 10-pay, or life-pay. And, indeed, no Traditional LTC insurance (T-LTCI) policy has guaranteed premiums; the premiums can be increased.
However, too often those hyping Hybrid LTC insurance misrepresent T-LTCI rate increases on old policies and unfairly project into the future the same rates of increase that have happened in the past.
One so-called LTC specialist tells prospective clients that T-LTCI premiums increase 8% every year; this is grossly deceptive as no T-LTCI plan has ever increased rates every year. While this may the average annual increase looking back at old policies issued 15-20 or more years ago, this kind of projection is especially misleading for new-business premiums that have all of the past pricing mistakes corrected for or "baked into" the new premiums being quoted today.
The Traditional LTC insurance fundamentals have changed!
Looking forward - versus only trying to drive looking in the rear-view mirror - the risk of significant rate increases on traditional LTC insurance has been dramatically reduced. The fundamentals have changed. Premiums for new T-LTCI policies have already been adjusted for ALL the past pricing mistakes. In fact, a Society of Actuaries study from 2016 projects there is only a 10% chance of future rate increases on new T-LTCI policy premiums, and IF a premium increase were needed in the future the increase would average only 10%!
Even IF there were a 40%* increase in the traditional premium year 10, the net benefits after a 4-year claim of the "Keep Your Cash" strategy is nearly $401,000 vs. just $76,000 for the hybrid plan!
Is it worth significantly over-paying just to guarantee your premiums? Maybe, but not in most cases once you consider ALL the factors and ALL of your options. Can your agent/advisor do that for you? If not, you need a second opinion! (BTW, if an agent does not sell T-LTCI or tells you up-front you should never buy it, ANY comparison he shows you is biased, flawed and likely full of misleading misinformation.)
It is not as simple as one premium is guaranteed and another is not. Or that one has cash value plus an insured death benefit and another does not. You must analyze all the numbers, the significantly different premiums, the continuing value of the cash you keep, and the significant risk in giving up access to your emergency, liquid cash for 20+ years of retirement.
Don't buy the hybrid hype. Get the facts. Keep Your Cash!
However, too often those hyping Hybrid LTC insurance misrepresent T-LTCI rate increases on old policies and unfairly project into the future the same rates of increase that have happened in the past.
One so-called LTC specialist tells prospective clients that T-LTCI premiums increase 8% every year; this is grossly deceptive as no T-LTCI plan has ever increased rates every year. While this may the average annual increase looking back at old policies issued 15-20 or more years ago, this kind of projection is especially misleading for new-business premiums that have all of the past pricing mistakes corrected for or "baked into" the new premiums being quoted today.
The Traditional LTC insurance fundamentals have changed!
Looking forward - versus only trying to drive looking in the rear-view mirror - the risk of significant rate increases on traditional LTC insurance has been dramatically reduced. The fundamentals have changed. Premiums for new T-LTCI policies have already been adjusted for ALL the past pricing mistakes. In fact, a Society of Actuaries study from 2016 projects there is only a 10% chance of future rate increases on new T-LTCI policy premiums, and IF a premium increase were needed in the future the increase would average only 10%!
Even IF there were a 40%* increase in the traditional premium year 10, the net benefits after a 4-year claim of the "Keep Your Cash" strategy is nearly $401,000 vs. just $76,000 for the hybrid plan!
Is it worth significantly over-paying just to guarantee your premiums? Maybe, but not in most cases once you consider ALL the factors and ALL of your options. Can your agent/advisor do that for you? If not, you need a second opinion! (BTW, if an agent does not sell T-LTCI or tells you up-front you should never buy it, ANY comparison he shows you is biased, flawed and likely full of misleading misinformation.)
It is not as simple as one premium is guaranteed and another is not. Or that one has cash value plus an insured death benefit and another does not. You must analyze all the numbers, the significantly different premiums, the continuing value of the cash you keep, and the significant risk in giving up access to your emergency, liquid cash for 20+ years of retirement.
Don't buy the hybrid hype. Get the facts. Keep Your Cash!
* The 4% interest rate is hypothetical. Examples are not reflective of any particular individual or specific company's policy and are for illustrative and general educational purposes only. Not all options may be available in all states. Contact us for more information and for a personalized illustration including disclosures and exclusions.
by Bill Comfort, CSA, CLTC, LTCCP
UPDATED 3/6/2024
UPDATED 3/6/2024
