Presently 60% of those over 65 will need long term care at some point. Nursing home care averages $200/day or $73,000/year. Assisted living averages $35,000/year. And unskilled home care generally starts at $15/hour.
Long term care insurance is designed to bridge the gap where Medicare or private insurance ends. But it can be expensive and it is difficult to estimate how much you will need. Or whether you will use it at all.
Enter the Hybrid
Blended or hybrid insurance products are now on the market from reliable companies. These offer life insurance and annuities combined with long term care benefits. So if you need the LTC benefits they are available, but if not the annuity or life benefits can be tapped or passed to heirs.
Some Considerations
Look carefully at the details of these hybrid policies as compared with traditional LTC policies. They will likely have larger up-front costs which should be balanced against simply purchasing a smaller LTC policy along with a separate annuity product that will give you guaranteed payouts starting at age 65.
Also look at whether a policy offers inflation protection. If you are in your 50s now, the $200/day coverage you buy now may be worth much less unless the policy adjusts benefits annually for inflation.
Under new U.S. federal rules, benefits paid out under annuity or life policies are tax free if you use them to purchase LTC insurance. This is a recent change, and will save you the 25% or more tax you would have otherwise paid. Federal tax law also allows you to deduct the cost of LTC premiums paid so long as you otherwise itemize deductions.
Deferred Annuity Hybrid Deferred Annuity Hybrid
Since this is an annuity product, you should first determine that an annuity fits with your retirement planning. Typically one invests over many years, and earnings accumulate tax deferred. There is protection against loss with a guaranteed income beginning on a certain date.
If your long term care needs exceed what you have planned for, or you see tax benefits to using the annuity payouts for such care, the hybrid policies are useful.
Examine what triggers LTC coverage, what exactly is covered (home care, nursing care, assisted living, etc.), how much is paid per day, how long the LTC benefits last, and what early withdrawal penalties may be.
Choose a waiting period-the time before benefits start--with which you are comfortable. This will depend on how much other insurance or cash you have to tide you over until benefits begin.
You can also create your own hybrid if you presently have an annuity by using payouts tax-free to purchase the LTC insurance.
Life Insurance Hybrid
These policies aim to provide your beneficiary with life insurance death benefits regardless whether you use the LTC benefit. Some even compensate a family member for parental care. The prices are generally locked for your life so inflation protection is not an issue. And most policies do not require traditional life insurance medical exams.
If you find yourself in a financial pinch you may be able to retrieve all of your principal without a surrender charge or penalty.
The challenge can be that to get the most from such policies, you may have to make a large one-time purchase. Some plans allow this to be spread over a few years. But you or your beneficiaries are very likely to get it all back at some point-and then some.
Look at how long the LTC "rider" allows LTC to be paid and compare that to average nursing home stays-presently 2 to 2.5 years.
Generally the greatest benefit to these hybrids comes in the form of LTC protection. For example, a one time $100,000 premium hybrid policy from John Hancock provides 6 years of LTC at $84,192 for a total benefit of $505,152. This would of course diminish life insurance payouts accordingly, but not below a minimum $5,000 "burial expense" payout.
If the universal life policy options described above are simply too expensive, consider purchasing a LTC policy and also a small term or universal life policy of $50,000 or so to compensate your estate for the LTC insurance premiums you would pay over a 20-25 year period. That way if you never need the LTC insurance your estate will break even--provided you calculate the life insurance premiums into how much coverage you carry.
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