Apr 6th, 2020
Editor's note: This article was originally written in 2012 but updated in February, 2020 to reflect changing market conditions.
In 2020, the "gold standard" for return of premium when purchasing Long Term Care Insurance is found in the form of hybrid policies.
If you're not familiar with hybrid long term care insurance, read up here for our primer.
Return of Premium is attractive to many because the thought of getting back your money if little or no Long Term Care services are needed makes sense. You'll need to ask yourself a few questions, however.
Surrender Value vs Life Insurance Benefit
Surrender Value: What it Means
If you're looking to potentially cancel your policy and get a full return of premium, you'll want to look at hybrid policies that have 100% surrender value. As of this writing (2/4/2020) there are options from Lincoln, Securian, and PacLife that provide either immediate 100% surrender value options or vested after as little as five years.
Return of Premium as Life Insurance
For many, they may not live to see the "return of premium" as it can be paid as Life Insurance tax-free to their named beneficiary. In fact, most plan designs return not only the original premium, but have a death benefit that is higher than the premiums paid.
As an example, a 50-year-old Female in Georgia who pays a single premium of $101,290 will receive a death benefit value of $144,000.24 - a 42.5% increase over premiums paid.
All of the mainstream hybrid long-term care plans pay life insurance and long-term care benefits 100% tax-free. Surrendering a policy can actually incur taxes even if you paid in, say, $100,000 and only received $100,000 back at Surrender. The reasons can be complicated (like all things tax-related) but boil down to the fact that, inside your policy, returns were being generated and premiums paid for LTC coverage.
While you didn't pay a penny, your policy was essentially "charging itself" the fees. If you never surrender your policy there's nothing to be concerned about. Just expect a tax bill if you decide to surrender your policy using its 100% surrender value, if available. If all of this is confusing, don't feel lost. Request a free chat with one of our advisors, and a 100% free comparison quote of the hybrid company options available in your state.
Not All Hybrid Plans Have Good Surrender Values
Some hybrid plans may have very poor surrender values. Here's an example where a 50-year-old pays $101,290 in premiums and only would get back $46,488 if they surrendered the policy 9 years later at age 59:
This reality underscores the importance of working with someone who has integrity and can show you the pros and the CONS of the policy you're considering! (Request a comparison quote now)
If you're interested in a historical "Traditional" policy (yours or that of a parent) you may find these older definitions from Traditional policies helpful:
There are three incarnations of Return of Premium, and each company selling Long-Term Care Insurance coverage will offer at least one:
Full Return of Premium
- Return of Premium, often referred to as “full return of premium,” will give your beneficiary a death benefit equal to the sum of your LTC premiums paid over time. This is available with several carriers, including Mutual of Omaha, and is the most expensive option you can buy of the three Return of Premium options.
**Example: **In our example case, the premiums for a standard 3/150 for a “Standard” rated 59-year-old were $2,441 and adding the full “Return of Premium” rider made them $7,789. WOW!
Return of Premium Less Claims
- Return of Premium less claims: the sum of your LTC premiums paid are returned less any claims paid. So if you paid in $25,000 but used $15,000 in claims dollars before dying, your beneficiary would receive back $10,000 in premiums. More liekly, you either don’t use the policy and they get everything back, or you use it and use significnatly more than you paid, meaning they get nothing back. The biggest risk with this option is that you pay more for it for many years and then use your benefits to their fullest extent, meaning you paid extra for this but don’t benefit from that extra cost at all.
**Example Cost: **The $7,789 referenced above drops to $6,665 if we drop it to “return of premium less claims.”
Again, the problem with this is that if you make a claim, you’ll likely have paid extra for this option for many years to no avail, because you’ll quickly surpass your payments over the lifetime when on a claim.
Graded Return of Premium
- Graded return of premium: the least expensive option available, Graded policies are offered by some like Genworth Financial, and a similar incarnation is available with Mutual of Omaha. With these, which are nominal in cost, your Return of Premium benefit goes away with time. With Genworth’s option, you’ll get a percentage of it back up to age 75, when it drops to zero.
To add this option to your Mutual of Omaha policy is only $37 per year, but after age 65 your benefit goes away and you wouldn’t have return of premium benefits.