Pros, cons of hybrid policies for long-term care

About 70 percent of people who reach age 65 can expect to use some form of long-term care during their lives, says the U.S. Department of Health and Human Services, and those statistics drive sales of long-term care insurance policies.

But nearly everyone who buys one of the policies wonders if he’ll be in the 30 percent of Americans who never will need long-term care — a group that never will see any payback from its investment in the policies.

“Long-term care insurance is not inexpensive, so it’s a valid concern,” says Chris Abts, president of Cornerstone Retirement Group, a financial planning firm in Reno.

For those who worry that they’re throwing money away on long-term care insurance, Abts sometimes suggests a hybrid product that combines life insurance coverage with a long-term care rider.

Here’s how it works:

You buy a cash-value insurance policy. The rider spells out the long-term coverage terms. The long-term care benefits that are paid come out of the policy’s death benefit. Your beneficiaries get what’s left when you die.

“The benefits are going to be paid out regardless,” says Abts.

But the additional feature comes at a price, an industry expert says, and consumers need to think carefully before they make a purchase.

“The insurance companies aren’t giving this stuff away,” says Jessie Slome, executive director of the American Association for Long-Term Care Insurance, an industry group based in Westlake Village, Calif.

The hybrid policies historically have been sold as a single-payment premium policies in which you pay the entire amount upfront. Slome’s association says payments of $50,000 or $75,000 — double that for a couple — are common for adequate coverage amounts.

Many consumers find that the unbundled costs of a separate life policy — assuming they really need one — and a separate long-term care policy make more financial sense.

One potential money-saving strategy, Abts says, involves a no-longer-needed traditional life insurance policy that’s accumulated cash value. That cash value might allow exchange into policy with a long-term care rider.

And it’s not just the difference in premium cost that needs to be part of the calculation.

Many taxpayers can deduct the cost of long-term care insurance premiums from their federal income taxes, where it’s considered a medical cost. Life insurance premium costs aren’t deductible.

Also, inflation riders commonly are available with long-term care policies, and many financial planners say protection against inflation is one of the most important aspects to consider in a long-term care policy.

While some life insurance policies provide inflation riders, they’re far less common. In fact, Slome says an estimated 96 percent of all hybrid policies don’t carry inflation protection.

One pitfall to watch carefully: If you’re buying life insurance for a specific need — say, to provide liquidity to pay estate taxes after your death — a hybrid policy carries the substantial risk that you’ll drain the benefits for long-term care. They won’t be available when they’re needed.

Slome says consumers should exercise care and make sure they understand the hybrid policy they plan to buy.

“Most people approach these as a five- or 10-minute decision,” he says. “But the products come in all different flavors these days. You better talk with a knowledgeable specialist.”

At the same time Slome says consideration of any kind of long-term care insurance always is a good step.

People routinely buy homeowners insurance without expecting that their house will burn down so that they can get their money back, he notes, suggesting that buyers of long-term care insurance need to view the policies as protection rather than a financial asset.

If nothing else, Slome says people who have long-term coverage are less likely to stint on their needs because of money worries — the guy who figures he can care for his ailing wife a month or two longer to save on home-care costs. “You will get earlier access to care, and you will get better access to care,” Slome says. “Doing something is always better than doing nothing.”