Linked benefit plans, otherwise known as hybrid long term care (LTC) insurance, are quickly growing in popularity as an attractive alternative to standalone LTC policies. Sales of standalone policies plummeted 70% in the last five years while hybrid annuity premiums exceeded standalones in each of those years.
Sales of long term care insurance policies, which grew rapidly in the mid- to late 1980s and 1990s, began declining in response to sizable premium increases for new and existing policies. This was directly attributable to LTC carriers experiencing claims for longer periods and higher policy retention rates than originally projected. The change from unisex to gender-based pricing in 2013 resulted in skyrocketing premiums for new policies for women.
Linked Benefit Plans to the Rescue
Linked benefit plans combine long-term care insurance with either a fixed annuity or permanent life insurance. Universal or whole life is generally used for the life insurance component.
There are six advantages of linked benefit plans compared to standalone LTC insurance policies that are responsible for their growing popularity:
- Fixed number of premium payments
- No premium increases
- Return of premium
- Potential death benefit
- Easier underwriting
- Inadvertent policy lapse minimized
Fixed Number of Premium Payments
In order to keep a LTC insurance policy in place, you must continue to pay premiums for the rest of your life unless you go on claim at which time premiums are typically suspended. Most hybrid plans are funded with either a single premium or payments for a fixed number of years. The number of years varies from 2 to 20 depending upon the particular product.
No Premium Increases
There are no premium increases if you choose to make payments over multiple years with hybrid plans. There are two reasons for this.
First, insurance companies that sell hybrid plans receive their money sooner than with standalone LTC policies. Premiums are paid as either a single lump sum or over a limited number of years vs. being spread out over one’s lifetime as is the case with traditional standalone policies.
Second, LTC premiums are subsidized by lower surrender values or death benefits than a standalone fixed annuity or permanent life insurance policy, respectively, assuming the same premiums.
As an example, the projected surrender value of one of the fixed annuity LTC plans for a 62-year old woman with a one-time premium payment of $100,000 who doesn’t use her LTC benefits is $78,000 to $87,000 throughout the life of the policy. The value of a standalone fixed annuity with the same premium would be a minimum of $100,000 and would increase with interest crediting.
Return of Premium
While some traditional LTC policies have an option that provides for a return of a portion or all premiums if you never go on claim, it isn’t very popular due to the additional premium required for this option.
Most hybrid plans include a return of premium feature with the amount and timing dependent upon whether the plan is fixed annuity- or life insurance-based as well as the particular product. Several life insurance products provide for a return of 80% to 100% of premiums which can be exercised after five years. Annuity products use a declining surrender charge schedule to calculate the return of premium amount.
Potential Death Benefit
Beneficiaries of hybrid plans will be paid a surrender value for fixed annuity plans or a death benefit for life insurance plans to the extent that withdrawals haven’t been taken or long term care benefits have been paid.
Individuals who would be declined for traditional long term care insurance for health reasons are often able to receive approval for hybrid plans. The latter, especially those that are annuity-based, have more liberal underwriting guidelines than standalone LTC insurance plans.
Annuity-based plans are the easiest to qualify for since they generally don’t require medical records or a paramed examination. Health issues are more problematic when applying for life insurance hybrid plans since benefits can be reduced using a table rating assuming coverage is approved. Your insurance agent should prequalify you before submitting an application to determine which carrier and product is best for you.
Inadvertent Policy Lapse Minimized
A standalone long-term care insurance policy will lapse, or be cancelled, if premiums aren’t paid in a timely manner, including any grace period, which is generally 31 days after the premium due date. An inadvertent lapse can occur if a decline in the insured’s cognitive abilities causes the insured to miss a premium due date.
Given the fact that hybrid LTC policy premiums are often paid in one lump sum or for a fixed number of years, which is 2 to 10 in most cases and no longer than 20, the opportunity for inadvertent policy lapse is minimized.
Commitment to Keep Policy in Force is Essential
Whether you’re considering the purchase of a standalone or a hybrid long term care insurance policy, commitment to keep your policy in force is essential to receiving benefits. For a standalone policy, this requires payment of premiums for the rest of your life unless you go on claim at which time premiums are typically suspended.
Although linked benefit plans generally have a predefined number of premium payments without any potential increases, premiums are greater since the number of payment years is limited to 1 to 20 depending on the particular product. Like standalone plans, all required premiums must be paid to keep the policy in force.
Linked benefit plans have a second hurdle to overcome in order to receive full LTC benefits. You must not exercise the return of premium feature. While it’s comforting to know that you can request a return of 80% to 100% of your premiums after a specified period of time, this should only be done as an absolute last resort.
The amount of potential forfeited LTC benefits are typically significantly greater than the amount of premium that would be returned. As an example, a 62-year old woman who pays a one-time premium of $100,000 with a return of premium of $80,000 that she exercises would forfeit $600,000 to $1.5 million of potential LTC benefits assuming that she qualifies for them beginning sometime between age 72 and 92 with one of the available fixed annuity LTC plans.
Uninsured medical expenses, including extended care, are the top financial worry among men and women age 55 and older. Studies have shown that people are five times more worried about being a burden to their family than dying. Failing to plan for extended care can be detrimental to the achievement of retirement income goals.
Linked benefit plans offer an attractive alternative to standalone LTC insurance assuming that a commitment is made to pay the required premiums and not exercise the return of premium feature. Easier underwriting makes these plans especially appealing to individuals who don’t qualify for traditional LTC insurance.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.