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 or Hybrid LTC Insurance?The "new kind" of LTC insurance is known as a "linked-benefit" or "hybrid" LTC insurance policy. (It has 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. The life insurance trade industry group LIMRA lumps all of the different types of linked/hybrid type of plans into a single category it calls "combination" LTC insurance.^ As you will see below, they are NOT all created equal. |
"What if I never need long-term care? |
This is a common objection to buying LTC insurance, and a Hybrid 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) add additional costs which are often obscured with misleading marketing messages.
There are circumstances where Hybrid LTC is the best choice - you can read about those here.
At Comfort Long Term Care we do not pre-judge what is best for you. Our TakeCare! planning process guides our work with you, your family and your other financial advisors to design and recommend highly-customized, personal plans from among ALL of the different types of LTC insurance, Hybrid and Traditional.
Here are descriptions and definitions of the many different types of combination, linked-benefit, hybrid, or asset-based LTC insurance policies:
There are circumstances where Hybrid LTC is the best choice - you can read about those here.
At Comfort Long Term Care we do not pre-judge what is best for you. Our TakeCare! planning process guides our work with you, your family and your other financial advisors to design and recommend highly-customized, personal plans from among ALL of the different types of LTC insurance, Hybrid and Traditional.
Here are descriptions and definitions of the many different types of combination, linked-benefit, hybrid, or asset-based LTC insurance policies:
Life insurance with extended LTC insurance benefits
This type of Hybrid LTC insurance is designed primarily to pay for long-term care expenses. The death benefit is secondary and is limited to allow for more of the premium to be applied to expanded LTC benefits.
In addition to letting a policyholder use up or "accelerate" the base death benefit to pay for long-term care expenses, 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. Typically the death benefit is used up over the first two to three years of a LTC claim. Then the "extension of benefits" or "continuation of benefits" kicks in. The LTC extension or continuation of benefits typically provide for an additional two to five years of LTC coverage past the base policy's accelerated death benefit which equals a total LTC benefit of five or six years; one company offers a lifetime/unlimited continuation of LTC benefits.
If long-term care is never needed, the death benefit is paid to beneficiaries, and typically the policy also guarantees a 50% to 100% return of your premium/cash value if you decide to cancel the policy. CLICK HERE for a list of companies and the product names that represent this type of plan.
This is the "best" type of linked-benefit or Hybrid LTC policy to use if your main goal is planning for long-term care ... BUT, interestingly, it is also the least-commonly sold of all the "combination" policies in the industry. In 2018 only 9% of life-linked/hybrid/combo LTC plans were of this "best-in-class" extension-of-benefits design.^ (LTC annuities with an EOB provision - described later in this article - are included in this same data point.)
Premiums are typically paid as a single lump-sum, or spread out over 5 to 15 years. There are new options that have a pay-as-you-go, annual premium for life. True linked-benefit Hybrid 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 creates a $120,000 death benefit and a $360,000 total LTC benefit. With a 6-year LTC benefit, the policy provides $5,000 per month for long-term care expenses with no increase for inflation. (To add an automatic 3% compound benefit increase, the premium would be $110,000.)*
Built-in, automatic benefit increases for inflation are available as an option, but are often not quoted. In some cases the inflation benefit does not apply to LTC benefits paid in the first two to three years, or the benefit increases may stop after 20 years. It is very important to properly compare the actual costs of these plans when comparing to a Traditional LTC insurance policy that usual does include automatic benefit increases 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 even easier underwriting because the company gets to keep a large amount of your money from day one.
These extended-benefits for LTC Hybrid policies are designed to maximize the LTC benefit and should be considered first among the Hybrid options when the primary planning need is for long-term care funding.
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 guaranteeing premiums.
In addition to letting a policyholder use up or "accelerate" the base death benefit to pay for long-term care expenses, 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. Typically the death benefit is used up over the first two to three years of a LTC claim. Then the "extension of benefits" or "continuation of benefits" kicks in. The LTC extension or continuation of benefits typically provide for an additional two to five years of LTC coverage past the base policy's accelerated death benefit which equals a total LTC benefit of five or six years; one company offers a lifetime/unlimited continuation of LTC benefits.
If long-term care is never needed, the death benefit is paid to beneficiaries, and typically the policy also guarantees a 50% to 100% return of your premium/cash value if you decide to cancel the policy. CLICK HERE for a list of companies and the product names that represent this type of plan.
This is the "best" type of linked-benefit or Hybrid LTC policy to use if your main goal is planning for long-term care ... BUT, interestingly, it is also the least-commonly sold of all the "combination" policies in the industry. In 2018 only 9% of life-linked/hybrid/combo LTC plans were of this "best-in-class" extension-of-benefits design.^ (LTC annuities with an EOB provision - described later in this article - are included in this same data point.)
Premiums are typically paid as a single lump-sum, or spread out over 5 to 15 years. There are new options that have a pay-as-you-go, annual premium for life. True linked-benefit Hybrid 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 creates a $120,000 death benefit and a $360,000 total LTC benefit. With a 6-year LTC benefit, the policy provides $5,000 per month for long-term care expenses with no increase for inflation. (To add an automatic 3% compound benefit increase, the premium would be $110,000.)*
Built-in, automatic benefit increases for inflation are available as an option, but are often not quoted. In some cases the inflation benefit does not apply to LTC benefits paid in the first two to three years, or the benefit increases may stop after 20 years. It is very important to properly compare the actual costs of these plans when comparing to a Traditional LTC insurance policy that usual does include automatic benefit increases 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 even easier underwriting because the company gets to keep a large amount of your money from day one.
These extended-benefits for LTC Hybrid policies are designed to maximize the LTC benefit and should be considered first among the Hybrid options when the primary planning need is for long-term care funding.
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 guaranteeing premiums.
Be careful to properly analyze the cost of a Hybrid LTCI plan, 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 only accelerates the death benefit for LTC
Many insurance companies are only adding a LTC "rider" to their traditional life insurance policies. This is not primarily LTC insurance, it is primarily life insurance with a LTC accelerated death benefit option.
The LTC rider is a type of "accelerated death benefit" (ADB) and simply makes the death benefit - or a portion of the DB - 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. The acceleration for LTC is typically 2% to 4% of the death benefit each month, and the acceleration percentage may be a flexible option at the time of purchase.
In most cases the LTC acceleration is paid on a "cash benefit" basis regardless of your actual care expenses or who takes care of you, but a few companies require paid care receipts from third-party professional care givers or facilities and then only reimburse your actual care expenses up to the monthly acceleration percentage.
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. In 2018 these plans represented 27% of all "combination" LTC policies sold.^
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 - there is less LTC risk to the insurance company as it is the same as the death benefit risk. The underwriting focus is therefore primarily on the death risk.
EXAMPLE:
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. If the policy only allows for an 80% LTC acceleration, then the benefit would be $4,000 per month for 50 months, but the unused $50,000 remains payable as a death benefit.*
Inflation increases are not available; the benefits - monthly and total - are fixed.
Premiums may or may not be guaranteed depending on the type of life insurance - this is critically important to understand as LTC benefits must be kept in-force into very old age. In some cases the base life premiums are guaranteed, but the separate LTC ADB rider is not. Premiums are typically on-going, annual payments, though like with any life insurance policy they can be structured to be paid-up in a limited period of time with higher premiums.
If the ADB rider is marketed as a "Long-Term Care" rider it may also be called a "Tax-Qualified" or "7702B" LTC plan referring to the provision in the US Tax Code that guarantees tax-free benefits for LTC benefits paid from these plans. (See our updated Tax Guide for more information on LTC tax provisions.)
"CHRONIC ILLNESS" VARIATION
Some companies offer a similar "Chronic Illness" accelerated death benefit (ADB) 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 - though that is changing with the claim eligibility criteria (physical help with at least 2 Activities of Daily Living or supervision for a Cognitive Impairment) closely matching other Tax-Qualified LTC plans in many cases.
Beware of and avoid plans with these limitations:
These plans are sometimes also called "101 (g)" plans referring to the provision in the US Tax Code related to life insurance. NOTE that even though these are not "Tax-Qualified" as LTC insurance, any Chronic Illness benefits paid are still tax-free under a separate tax provision.
(These should not be confused with "Critical Illness" policies that pay a lump sum if diagnosed with specific medical conditions like cancer, stroke, heart attack, etc. "Critical Illness" benefits are NOT for LTC planning but may be used in addition to a dedicated LTC plan.)
Most problematically for many of these plans - especially when the "Chronic Illness" or "Living Benefits" are marketed as being "free" without a separate charge for the benefit - the actual Chronic Illness benefits may not be guaranteed or knowable in advance.
No benefit is ever "free." These Chronic Illness policies calculate your benefit at the time of claim based on your age and even degree of impairment. The amount of the death benefit that is accelerated is reduced or "discounted" before the monthly acceleration percentage is applied, and in some cases once the Chronic Illness acceleration is over, there is no remaining death benefit!
EXAMPLE:
A life insurance policy with a $250,000 death benefit and built-in, "free" Chronic Illness ADB benefit may only accelerated 70% of the base death = $175,000. At 2% it would therefore pay out $3,500 per month. But once the $175,000 is accelerated, the policy ends with no remaining death benefit or maybe only a small residual amount like $5,000.*
Premiums are typically on-going, annual premiums for life, and most commonly are not guaranteed, though there are exceptions with guaranteed or limited-duration premiums.
There is usually no underwriting for the "disability"/Chronic Illness risk for plans with a built-in, no-charge, "discounted" Chronic Illness ADB benefit; the only underwriting concerns are the death risk.
A Chronic Illness policy typically does not have fully-guaranteed premiums and may even be part of a term insurance contract that may not be able to be kept or afforded into old age when the Chronic Illness coverage is most necessary from an extended care planning perspective.
A Chronic Illness ADB rider is recommended for people who primarily need life insurance, but want some LTC-type of coverage just in case - especially for those with problematic health conditions related to LTC/disability risks. Again, an accelerated death benefit provision is usually NOT the preferred or nor best way to fund for long-term care.
There are a few life insurance policies with a truly separate Chronic Illness ADB rider that also has a separate rider premium associated with it. These variations work more like the "regular" Tax-Qualified LTC riders defined in the previous section with a knowable, defined monthly benefit. A separate, premium-paid Chronic Illness rider generally has a higher-level of underwriting than the built-in, "discounted acceleration" design discussed above, but it usually has easier underwriting than an extension of benefits Hybrid LTC policy or a Traditional LTC policy.
Life insurance with a Chronic Illness ADB rider is becoming a very popular option for voluntary group employee benefit plans as an alternative to very limited - and hard to sell - group LTC insurance.
In 2018 "Chronic Illness" ADB plans represented 64% of all "combination" LTC policies sold.^
It is disturbing that the super-majority of policies being sold - and bought - for "long-term care" planning are the least-effective way to insure for future long-term care expenses. In many cases the sale of Chronic Illness ADB plans comes from agents who have chosen not to complete the required training to be able to sell a true LTC insurance policy or a Tax-Qualified LTC "hybrid" policy or rider.
The LTC rider is a type of "accelerated death benefit" (ADB) and simply makes the death benefit - or a portion of the DB - 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. The acceleration for LTC is typically 2% to 4% of the death benefit each month, and the acceleration percentage may be a flexible option at the time of purchase.
In most cases the LTC acceleration is paid on a "cash benefit" basis regardless of your actual care expenses or who takes care of you, but a few companies require paid care receipts from third-party professional care givers or facilities and then only reimburse your actual care expenses up to the monthly acceleration percentage.
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. In 2018 these plans represented 27% of all "combination" LTC policies sold.^
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 - there is less LTC risk to the insurance company as it is the same as the death benefit risk. The underwriting focus is therefore primarily on the death risk.
EXAMPLE:
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. If the policy only allows for an 80% LTC acceleration, then the benefit would be $4,000 per month for 50 months, but the unused $50,000 remains payable as a death benefit.*
Inflation increases are not available; the benefits - monthly and total - are fixed.
Premiums may or may not be guaranteed depending on the type of life insurance - this is critically important to understand as LTC benefits must be kept in-force into very old age. In some cases the base life premiums are guaranteed, but the separate LTC ADB rider is not. Premiums are typically on-going, annual payments, though like with any life insurance policy they can be structured to be paid-up in a limited period of time with higher premiums.
If the ADB rider is marketed as a "Long-Term Care" rider it may also be called a "Tax-Qualified" or "7702B" LTC plan referring to the provision in the US Tax Code that guarantees tax-free benefits for LTC benefits paid from these plans. (See our updated Tax Guide for more information on LTC tax provisions.)
"CHRONIC ILLNESS" VARIATION
Some companies offer a similar "Chronic Illness" accelerated death benefit (ADB) 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 - though that is changing with the claim eligibility criteria (physical help with at least 2 Activities of Daily Living or supervision for a Cognitive Impairment) closely matching other Tax-Qualified LTC plans in many cases.
Beware of and avoid plans with these limitations:
- Chronic Illness benefits are only paid if in a nursing home.
- The need for help (with ADLs or cognitive) must be "permanent."
- Benefits are only paid for a loss of physical ADLs with no explicit provision for a "cognitive impairment."
These plans are sometimes also called "101 (g)" plans referring to the provision in the US Tax Code related to life insurance. NOTE that even though these are not "Tax-Qualified" as LTC insurance, any Chronic Illness benefits paid are still tax-free under a separate tax provision.
(These should not be confused with "Critical Illness" policies that pay a lump sum if diagnosed with specific medical conditions like cancer, stroke, heart attack, etc. "Critical Illness" benefits are NOT for LTC planning but may be used in addition to a dedicated LTC plan.)
Most problematically for many of these plans - especially when the "Chronic Illness" or "Living Benefits" are marketed as being "free" without a separate charge for the benefit - the actual Chronic Illness benefits may not be guaranteed or knowable in advance.
No benefit is ever "free." These Chronic Illness policies calculate your benefit at the time of claim based on your age and even degree of impairment. The amount of the death benefit that is accelerated is reduced or "discounted" before the monthly acceleration percentage is applied, and in some cases once the Chronic Illness acceleration is over, there is no remaining death benefit!
EXAMPLE:
A life insurance policy with a $250,000 death benefit and built-in, "free" Chronic Illness ADB benefit may only accelerated 70% of the base death = $175,000. At 2% it would therefore pay out $3,500 per month. But once the $175,000 is accelerated, the policy ends with no remaining death benefit or maybe only a small residual amount like $5,000.*
Premiums are typically on-going, annual premiums for life, and most commonly are not guaranteed, though there are exceptions with guaranteed or limited-duration premiums.
There is usually no underwriting for the "disability"/Chronic Illness risk for plans with a built-in, no-charge, "discounted" Chronic Illness ADB benefit; the only underwriting concerns are the death risk.
A Chronic Illness policy typically does not have fully-guaranteed premiums and may even be part of a term insurance contract that may not be able to be kept or afforded into old age when the Chronic Illness coverage is most necessary from an extended care planning perspective.
A Chronic Illness ADB rider is recommended for people who primarily need life insurance, but want some LTC-type of coverage just in case - especially for those with problematic health conditions related to LTC/disability risks. Again, an accelerated death benefit provision is usually NOT the preferred or nor best way to fund for long-term care.
There are a few life insurance policies with a truly separate Chronic Illness ADB rider that also has a separate rider premium associated with it. These variations work more like the "regular" Tax-Qualified LTC riders defined in the previous section with a knowable, defined monthly benefit. A separate, premium-paid Chronic Illness rider generally has a higher-level of underwriting than the built-in, "discounted acceleration" design discussed above, but it usually has easier underwriting than an extension of benefits Hybrid LTC policy or a Traditional LTC policy.
Life insurance with a Chronic Illness ADB rider is becoming a very popular option for voluntary group employee benefit plans as an alternative to very limited - and hard to sell - group LTC insurance.
In 2018 "Chronic Illness" ADB plans represented 64% of all "combination" LTC policies sold.^
It is disturbing that the super-majority of policies being sold - and bought - for "long-term care" planning are the least-effective way to insure for future long-term care expenses. In many cases the sale of Chronic Illness ADB plans comes from agents who have chosen not to complete the required training to be able to sell a true LTC insurance policy or a Tax-Qualified LTC "hybrid" policy or rider.
These ADB for LTC riders are most appropriate for people with more complicated medical histories due to a more life insurance-only-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). You old annuity can be rolled over tax-free (using a "1035 Exchange") into a new annuity with Qualified 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 new LTC-qualified annuity pays for care, all of 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. One company offers a lifetime/unlimited continuation for LTC.
EXAMPLE:
$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 and are paid first for care.) 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 1.5% may only produce less than 1% in actual cash earnings after the internal 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 continuation of benefits kick in after. This type of annuity-LTC plan does require an extra premium to be paid for the benefit extension, but it is 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).
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. One company offers a lifetime/unlimited continuation for LTC.
EXAMPLE:
$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 and are paid first for care.) 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 1.5% may only produce less than 1% in actual cash earnings after the internal 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 continuation of benefits kick in after. This type of annuity-LTC plan does require an extra premium to be paid for the benefit extension, but it is 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 or hybrid LTC policy qualifies for
Medicaid Partnership asset protection
ComfortLTC offers all of these different types of Hybrid LTC plans and can show you options from different companies as well.
We'll even help you fairly compare a hybrid solution to traditional LTC plans.
* Examples shown are not reflective of any particular individual or specific company's policy, and are for illustrative 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.
^ LIMRA 2018 Individual Life Combination Products Annual Review
by Bill Comfort, CSA, CLTC, LTCCP
Updated August 7, 2020
Updated August 7, 2020
