Long-Term Care with a Death Benefit

Matt Stieglitz   |   March 2024   |   4-minute read
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It’s no secret that addressing long-term healthcare needs is a critical part of aging.

As people age, the likelihood of requiring extended care increases. That carries significant financial implications. And yet, it’s one of the most overlooked aspects of financial planning.

Insurance can help protect a portfolio from the cost of care, but the complexity of products can be intimidating.

In the long-term care (LTC) insurance market, there are two distinct categories: traditional policies, also referred to as standalone policies, and hybrid policies, which combine LTC coverage with another form of insurance to offer a comprehensive care solution.

If you haven’t discussed hybrid solutions with your clients, it may be a good way to balance multiple goals within a single product.

Exploring Hybrid

You may know hybrid LTC policies by several names.

Linked-benefit life insurance is most common, named because it addresses both life insurance and long-term care within a single policy. Asset-based LTC is another, since the money paid toward premiums can be leveraged as a financial asset. There are also combo policies, life with an LTC rider or life insurance with LTC benefits.

While there may be subtle differences in the product structure, for our purposes, these are all hybrid long-term care solutions.

Reframing Hybrid Coverage

The concept of hybrid products isn't new, but the way they're positioned in the market often fails to capitalize on their full potential. Rather than looking at these policies as life insurance with LTC benefits, let's flip it.

What you’re truly offering is a comprehensive long-term care plan that also encompasses a death benefit.

Typically marketed as life insurance or annuities with an added LTC feature, these products tend to emphasize their primary component, relegating LTC coverage to a secondary role.

However, by shifting the focus and framing them as LTC plans with a death benefit, financial advisors can better address the pressing need for long-term care planning while still providing a safety net for beneficiaries.

Draw from Existing Expectations

Consider the mindset of the average client approaching retirement.

Many are aware of the importance of long-term care planning but may feel overwhelmed or unsure about where to begin. They understand the potential financial burden of extended care but may not have a clear strategy in place.

On the other hand, discussions about life insurance are likely more familiar territory. Clients may have already considered or even purchased life insurance policies, often with the primary goal of providing for loved ones after they're gone.

Positioning hybrid products as LTC plans with a death benefit reframes the conversation in a way that resonates more deeply with clients' existing concerns and priorities.

Some clients may hesitate to invest in traditional LTC insurance due to concerns about "use-it-or-lose-it" scenarios, where premiums paid into the policy are forfeited if LTC benefits aren't utilized. Others may be deterred by the perception that LTC insurance is a sunk cost if they never require extended care. Remind them that life insurance premiums are structured in the same way.

It comes down to the financial priorities of each client.

If they want to use life insurance as a legacy planning tool, a hybrid policy can still provide a death benefit. However, its primary purpose is to keep existing assets from being drained by a long-term care event.

If clients are more concerned about needing care, frame the hybrid policy as an asset that covers LTC risk. And, as a bonus, leaves their beneficiaries with additional funds when they die.

It’s true that hybrid policies are built on a life insurance (or annuity) chassis. But unlike term policies or cash value policies that offer the maximum death benefit, hybrid policies are designed specifically to offer additional benefits for long-term care. The death benefit is secondary, but provides a guarantee that the policy will pay out, one way or another.

This reframing strategy highlights the versatility and value of these products, addressing both long-term care needs and legacy planning goals in a single solution.

Maximizing the LTC Benefits of a Hybrid Policy

Hybrid policies offer clients a way to save for long-term care while removing, or lessening, the risk of a major health event derailing their retirement. With a choice of payment plans ranging from funding the policy with a single payment, paying over a set number of years or even paying for life, a hybrid policy offers clients a couple of ways to recoup their premiums:

Long-term care benefits

If the insured qualifies for LTC, the policy pays an extended benefit, usually for two to six years of care. The first two years is roughly the same amount of the death benefit. The additional two to four years comes from a separate bucket, allowing the client to receive care worth two to four times their initial investment.

Death benefit

If the insured passes away without ever needing long-term care, the policy offers a death benefit of at least the amount of premiums paid in, and usually a bit higher. Because it’s a life insurance policy, the death benefit is received tax free to the beneficiaries.

Surrender the policy

If the client changes their mind, most hybrid plans will allow them to surrender the policy and get most, if not all, their premiums back. These return of premium options vary between insurance carriers and policies.

The biggest benefit, of course, comes if the client needs long-term care. If the death benefit were the goal, the client would be looking for a plan that does more than just return their premiums. Likewise, there are policies that offer more cash value for clients looking for an investment.

By focusing on the primary concern of clients – preparing for potential LTC needs – while still providing a valuable death benefit component, advisors can offer a more compelling and holistic solution.

It's time to align our messaging with the evolving needs and priorities of clients, ensuring that they have the resources and support necessary to navigate the complexities of long-term care planning with confidence and peace of mind.

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