A recent article by Jamie Hopkins, Professor of Retirement at the American College, describes the growing use of hybrid life insurance policies as an alternate way to fund long term care needs in retirement. The article details the incredible growth in the hybrid market over the past several years. Traditional long term care insurance is a specific insurance product that has been available for some time. Consumers have been shying away from this traditional product over the past several years for a variety of reasons. One of the main reasons is rising premiums due to a number of companies leaving the market place. When paying premiums, consumers also worry about the “Use it or lose” aspect of traditional long term care insurance plans.
Fortunately, there are two government regulations that allow insurance companies the option of adding benefit riders to life insurance and annuity products to help pay for chronic and terminal illness expenses while the insured is still living. These riders create two types of hybrid insurance products that are distinctly different than traditional long term care insurance.:
Linked Benefit Riders are very similar to traditional long term care plans. They typically reimburse care directly to the health care provider.
Accelerated Death Benefit Riders are more commonly used in the hybrid solution model. This rider is more popular because it pays a per diem benefit, in cash, to the policy owner versus to the health care provider. This gives a lot of flexibility in letting the policy owner use the funds in the manner best suited for their situation. Additionally, with many companies, this is a free benefit to the policyholder. Per the government, there is a distinction between these policies and traditional long term care insurance contracts. As such, hybrid life insurance policies that have benefit riders are not marketed as traditional long term care insurance policies because they are different products. The benefit riders in life insurance (and annuity) products are usually identified as Accelerated benefits or “Living benefits”
How Accelerated Death Benefit riders work
Linked Benefit Riders consist of a base insurance policy with a Long term care rider attached. They are commonly called “Asset-based” because they are directly funded. The funding includes purchasing a Long term care benefit with the policy.
Accelerated Death Benefit Riders work a bit differently. The life insurance or annuity contract includes a provision that a certain amount of the death benefit to be “Accelerated” back to the policyholder if the conditions of chronic or terminal illness are met (conditions apply to Linked Benefits as well). The amount of accelerated benefit paid is defined in the policy and based on actuarial calculations. In some policies, the payout can be 100%.
Long term care planning is an important part of your overall retirement planning strategy. Regardless of which approach you choose, long term care insurance or a hybrid insurance policy, having funds available can help ensure you do not deplete your retirement savings. The US Government has a very informative web page dedicated long term care that is worth reading to gain further information.