Long-term care planning includes putting in place proper insurance coverage. According to the California Partnership for Long-Term Care, approximately 70 percent of individuals who reach the age of 65 will need some type of long-term care assistance in the final years, and the average annual cost of care in California is $94,900. Those who don’t plan for long-term care needs can find themselves unable to cover their care expenses.
Medi-Cal and Medicaid Don’t Offer Complete Coverage for Long-Term Care
Many Californians do not realize that a combination of Medi-Cal and Medicaid only covers approximately 60 percent of long-term care expenses for those who qualify, leaving 40 percent of fees to be covered by the individual, either out of pocket or through private insurance. In short, insurance coverage is a must to properly plan for long-term care, which is an inevitable part of life for many Americans.
What Role Do Hybrid Insurance Policies Play?
Hybrid insurance policy models have been touted as the “optimal choice” for seniors, but are they all they are cracked up to be, and are they really the answer to support seniors who need long-term care? It is important to understand how traditional long-term care insurance works before addressing this question.
What is Long-term Care Insurance?
Long-term care (LTC) Insurance was introduced to the market in the mid 1970’s as an option for people nearing retirement age to save for the inevitable costs of care down the road. The state of California even created a public-private partnership in the 1990’s to “encourage more people to buy long-term care insurance and reduce state tax burdens.” LTC insurance was intended to cover the costs of all “custodial care,” which includes a person’s activities of daily living, either at home or in a facility. Unfortunately, the model was poorly designed and promises were made by companies to policy holders that simply could not be upheld.
The result is that monthly premiums for long-term care insurance policies have risen so high that they are no longer a viable insurance option for the middle class - in fact, Times reports that in California, roughly “133,000 residents who bought long-term care policies from CALPERS, the state workers’ retirement plan, have seen their premiums rise by 85% over two years.” Rather than helping the middle class bear the burden of future costs of care, many people are now left with three meager options: paying rising premium costs, scale back coverage, or drop their policy altogether.
What is Hybrid Insurance?
Hybrid Insurance policies were created to rectify some of the main issues attributed to LTC insurance. Forbes defines hybrid insurance as combining life insurance and LTC insurance into one single policy, allowing the policy holder to access funds for long-term care when and if necessary, and leave the remaining funds to their beneficiary upon death, just like a standard life insurance policy.
As with any form of insurance, there are pros and cons, and because everyone’s situation is unique, the suitability of a hybrid policy depends on your individual situation:
Hybrid policies are not based on a ‘use it or lose it’ model. This has been a very contentious area in traditional LTC insurance, as it is impossible for a person to predict if/when they will need long-term care assistance, and for how long. With hybrid insurance, the cash value is spent first for long-term care expenses, and “for those who make it through retirement without long-term care expenses, the death benefit remains.”
Hybrid plans also have:
- Guaranteed premiums with no hikes and no finite benefit periods
- A smoother and faster underwriting process compared to LTC insurance
- Options for seniors who do not qualify for traditional LTC insurance, due to poor health, age, or other high risks.
Although there are many great aspects to hybrid insurance policies, in comparison to traditional LTC insurance, there are some steep negatives. According to a Consumer Reports article by Ellen Stark, the upfront premium costs can be exorbitantly expensive – in 2016 the average single premium was $89,000 – and the premiums are not tax deductible.
Another concern is that information regarding rising interest rates, and the rate at which the insurance company will pay out is unclear and up to the discretion of the individual company. This means that theoretically, you could lose out on “thousands of dollars in potential earnings on your investment if interest rates rise, because the policies don’t guarantee that you’ll earn market rates,” Stark says. And currently, rates are at a 40-year low, which doesn’t bode well for future payout. In fact, financial writer Michael Kitces says these low rates “could end up making hybrids the most expensive long-term-care policy of all.”
At the end of the day, when selecting an insurance policy to protect yourself in your later years, consider your personal circumstances and needs. Hybrid insurance policies can most definitely support seniors who need long-term care in specific circumstances, however the benefits may not outweigh the disadvantages. Connect with a qualified and Certified Financial Planner™ with long-term care experience today to help you navigate the process.