The Best of Both Worlds?

A new option for long-term care insurance

If you’re approaching retirement, you’re probably concerned about managing the cost of any long-term care you may need. After all, the average monthly tab for a private nursing home room is now several thousand dollars.

At the same time, the premiums for traditional long-term care insurance often run thousands of dollars per year per person, and this could well increase. You’re forced to weigh this cost against the likelihood that you may end up not tapping into the policy. What’s more, the number of companies offering long-term care insurance has declined, leaving fewer options from which to choose.

A new way

Developing a viable plan for long-term care expenses, whether it involves an insurance policy or personal savings, is key to a secure future. Medicare typically doesn’t cover long-term care. Medicaid can, but only for those with extremely limited assets.

But a new product, a hybrid life, and long-term care policy, might address the concerns with traditional long-term care coverage. It combines life and long-term care insurance, typically by adding a long-term care rider to a traditional life insurance policy. This reduces the “use it or lose it” risk of traditional long-term care policies. Should you not need the long-term care benefits, your heirs receive a death benefit, much as with any other life insurance policy.

On the other hand, if you do need long-term care, the policy will help cover it. While this typically reduces the death benefit, it also means you have coverage for the costs of long-term care.

Most hybrid policies cover both home care and more formal care, though you’ll want to check into any exclusions on the policies you’re considering. (For instance, some exclude treatment for addiction.) To tap into the long-term care benefits, the policy may require a medical professional to verify that you’re unable to perform at least several “activities of daily living,” such as bathing and dressing. Some policies include waiting periods of, for instance, 90 days before their benefits kick in.

Costs and taxes

The new policies won’t work for everyone. Because they offer both long-term care and life insurance benefits, neither benefit individually is likely to be as large as it would be if you purchased separate long-term care and life insurance policies.

In addition, their costs may exceed those of stand-alone, standard life insurance policies. With many hybrid policies, the benefits are set once you’ve paid the premiums. Some insurers allow you to pay the premiums over a period of, say, 10 years. In other cases, you are required to pay the entire premium upfront. That’s an expense that can run tens of thousands of dollars.

One way to cover this cost may be through a 1035 exchange. This is named for the section of the tax code that allows you to, in some circumstances, roll over an annuity, such as a life insurance policy you no longer need, to cover the cost of a hybrid policy — without incurring taxes.

Some hybrid policies provide coverage even after the death benefit is exhausted, albeit usually at an additional cost. Here’s how this might work: Suppose your policy was for $150,000 and you withdrew $5,000 per month to cover long-term care costs. After 30 months, the death benefit would be depleted. But an extension-of-benefits rider would allow you to extend the long-term care benefits for a period of time.

The tax deductibility of premiums for hybrid policies and any long-term care benefits received from them aren’t yet clear. You’ll want to obtain professional advice.

Flexibility and security

A hybrid long-term care and life insurance policy might be a useful tool in your estate planning. In addition to offering more flexibility than many traditional long-term care policies, it can enable you to pass on a life insurance benefit, should you not need long-term care. Your accounting professional can help you assess how such a policy might fit into your estate and financial planning.

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