Most people say their biggest fear in retirement is a need for long-term care that exhausts their savings. Yet, most people don’t have long-term care insurance. The biggest reasons given for not having LTCI is that it’s expensive and people are concerned about paying all the premiums and never claiming benefits.
In response, insurers created the hybrid or combination policies. These are annuities or life insurance that have long-term care riders. They’re controversial. As I’ve discussed in past issues of Retirement Watch, the hybrid coverage generally is more expensive and not as robust as stand-alone LTCI. But hybrids also don’t tie up all your money, unless you max out hte coverage (depending on the policy).
Here’s another view of hybrid policies. It explains in detail how some of the policies work and provides some pros and cons.
There actually are two ways to use life insurance to protect against long-term care risk. The first is to buy a life insurance policy with a chronic illness rider. This is an accelerated death-benefit rider that can pay out 2% of a death benefit monthly to pay for care. That means the policy must be very large in order to pay out a significant benefit. In most states, these policies aren’t formally classified as LTC policies.
The second option is a combination life/LTCI policy, such as Lincoln National’s MoneyGuard Reserve Plus. This is a universal life insurance policy with an optional LTC benefit rider. Policy premiums can be paid upfront or in installments during a 10-year period, and the premium rates are locked in at the time of purchase. There’s also a refund feature available to buyers who change their minds, after all premiums have been paid.
“The biggest driver of a combination policy is the need people have to protect their assets in the event of a catastrophic long-term care need but not tie up their funds in an illiquid investment,” says Steve Schoonveld, assistant vice president, head of linked benefit product solutions at Lincoln National.