Pros and Cons of Single Pay Life+LTC Hybrids
We’ve covered hybrid long term care insurance policies on the site before, but we wanted to dive in a bit deeper on the concept of paying a one time, lump sum premium. The obvious advantage is that for some people, a single premium is a convenient way to “take care of” the Long Term Care financing conundrum once and for all. Like virtually every financial product, though, there are pros and cons and one approach may not fit all. In this article we’ll go through a few common advantages as well as pitfalls of the concept of a single premium option.
Who Are Single-Premium Life + LTC Hybrid policies for?
When actuaries sit down to design a life insurance policy, they take company factors into account, but they also realize there has to be a “carrot” to incentivize the market to consider their product. Hybrid policies are getting the lion’s share of attention right now and come with some of the most competitive offerings in the insurance industry. Every company’s policy design differs, and it depends on whether or not one wants to optimize their policy for one of the following three benefits:
- Cash Value – generally the value of the policy that accumulates over time.
- Long Term Care Benefits – the amount paid for specific long-term care expenses, if needed.
- Death Benefit – what is paid at death if no LTC services are needed.
Let’s analyze each of these independently. You cannot have all three maximized, each carries an associated expense and risk to the insurance company, so you’ll have to decide which two of the three are most important.
Cash Value or Surrender Value
Cash value in this instance may refer to an actual cash value the policy has, which may be borrowed against, or in general the concept of “surrender value” – what you get if you cancel the policy and ask for your money back. You usually cannot borrow from the policy surrender value itself. It’s not a big deal, though, because most people are not buying these hybrid products for the ability to take loans from them. That is usually the purvey of dedicated whole life insurance not LTC planning devices like these. Having the ability to get something back if you cancel the policy down the road is a nice benefit of these, but most consumers do not care if they get 100% of their premium back if they cancel prematurely. You have to decide if it is worth it to you, and if so there are some products that preserve premium at the expense of death and LTC benefits.
The Verdict: Optimizing for cash value or even surrender value seldom makes sense. Buy dedicated policies for that.
Long Term Care Benefits
Most people shopping for hybrid products are attracted to the Long Term Care Insurance aspect of these policies, so we’ll focus most of our energy here. There are several policies from major A+ rated insurers that optimize for Long Term Care benefits over higher death benefits or cash/surrender value. Such policies are the best selling on the market because they steer more of their internal costs towards the LTC expenses anticipated in the future.
The Verdict: Go with the most LTC benefit you can get if you are buying this policy to plan for such an event.
The entire point of hybrid policies is that if you don’t need LTC, a death benefit is paid. Most buyers of these policies are just happy to get their money back, not a huge windfall payment. The policies that optimize for LTC tend to provide generous – but not excessive – death benefits. This makes the true cost of such a policy the loss of earnings ability on the premium itself – which for many buyers is small given the source of funds may be low yield items including CDs or cash.
The Verdict: Try to ensure that at least your initial premium payment is returned as death benefit.