Federal Employees News Digest

Be careful when buying hybrid long term care insurance

Fewer individuals have been purchasing individual long term care (LTC) insurance policies in recent years. The decrease in individual LTC insurance policies can be attributed in part to the soaring cost of individual LTC insurance and fewer insurance companies offering it.

In its place, “hybrid” LTC insurance has become more popular and outselling traditional standalone LTC insurance policies. “Hybrid” LTC insurance is LTC insurance combined with an annuity or life insurance. But hybrid LTC insurance is not right for everyone. There are potential downsides that are explained in this column.

There are a number of advantages to buying hybrid LTC insurance, including: (1) While standalone LTC insurance premiums have risen substantially in recent years, hybrid LTC insurance premiums tend to remain stable; (2) it is usually easier for individuals to qualify for hybrid LTC insurance coverage because the underwriting standards tend to be less restrictive; and (3) traditional LTC insurance policies are “use or lose” insurance policies which means that if the insurance policyowner pays the premiums but never files a claim for benefits, drops the insurance or dies, then all premiums paid are lost. Hybrid LTC insurance policyholders will benefit one way or another – either through being reimbursed for LTC expenses or as a death benefit, or both.

But there are disadvantages to hybrid LTC insurance policies as well. With a standalone LTC insurance policy, the policyowner knows what is being purchased; in particular, the elimination or waiting period, the benefit period and the daily benefit amount. There is less flexibility in hybrid LTC policies and these policies tend to be misunderstood as to what “triggers” the insured to qualify for LTC and the insurance company reimbursing the insured for these LTC expenses.

It is important for individuals to ask themselves what is important to them and their biggest concerns. For example, single individuals without heirs and who live by themselves should be more interested in standalone LTC insurance policies because they probably do not need a life insurance benefit. On the other hand, individuals who want to pass on an estate to heirs upon their death may be interested in hybrid LTC policies because any LTC benefits not used upon their death will be passed on in the form of a death benefit to designated heirs.

Types of Hybrid LTC Policies and Tax Considerations

There are two types of hybrid LTC policies. The first type are policies in which the policyowner can spend down the entire death benefit for LTC expenses, thereby leaving no death benefit for heirs. The other type are hybrid policies with an “extension of benefits” rider that can continue LTC payment benefits to continue after the entire death benefit has been paid, providing additional funds for LTC expense reimbursement two to three times the death benefit.

There are also tax considerations when it comes to buying hybrid LTC policies. With standalone LTC insurances, the premiums paid can be included as qualifying medical expenses for federal income tax purposes. That may not be true when it comes to hybrid LTC policies. The Internal Revenue Code is unclear as to whether premiums paid on hybrid LTC policies are tax deductible or not. Potential purchasers are strongly encouraged to check with their tax advisers prior to purchasing a hybrid LTC policy in order to find out how much of the premiums paid, if any, may be includible as a qualifying medical expense on their taxes.

The Importance of Comparing Costs

Besides the unknown tax implications, many hybrid LTC policies charge high premiums. These high premiums typically have to be paid upfront when the policyowner is approved and receives the policy. On the other hand, a standalone LTC policy charges a monthly, quarterly or annual premium for the life of the policy. But while the upfront costs for a hybrid LTC policy are typically higher than a standalone LTC policy, a hybrid LTC policy may be less expensive over the long term. This is because traditional standalone LTC policies are subject to rate increases and these payments are made throughout the policyowner’s life. Hybrid LTC policy premiums rates are often guaranteed.

Finally, it is important to consider hybrid LTC policy benefit limitations. It is crucial that a hybrid LTC policyowner understand payout dollars. The benefit amount and the period of an LTC life rider is usually dependent on the size of a life policy death benefit. Many hybrid LTC policy riders allow a period of coverage for LTC expenses but keep a ceiling on the amount of monthly LTC benefit expense the policy will pay or reimburse the policyowner. It is important to understand with a hybrid LTC policy what types of situations qualify for the insurance company to pay the policyholder’s LTC expenses. Some hybrid LTC policies are more flexible than others depending on whether they cover and pay privately hired home aides or just institutional care (nursing home, assisted living) care. Or whether the insurance company reimburses for expenses paid by family for the care of insured or whether the insurance company pay LTC providers directly.

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. 

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Edward A. Zurndorfer Certified Financial Planner
Mike Causey Columnist
Tom Fox VP for Leadership and Innovation, Partnership for Public Service
Mathew B. Tully Legal Analyst

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