Hybrid policies blend long-term care and life coverage

One of the biggest mistakes people make in planning their health and life coverage is assuming they'll never need long-term care services, or that if they do need these services, they will pay for them with their savings.

Many people shy away from long-term care insurance because they worry about premium hikes or the fact that if they don't use the coverage, they never benefit from their premium payments. But now there is a policy that melds long-term care insurance with life insurance.

Here's how these hybrid policies work:

• You pay a lump-sum premium for a universal life insurance policy, which builds up a tax-deferred cash value, in addition to providing life insurance that will pay a death benefit to your beneficiaries.
• If you need long-term care services, you can use this death benefit to help pay for the cost.
• Depending on the terms of the coverage, a $500,000 life insurance policy might pay from $200,000 to $500,000 toward the cost of nursing home care, in-home care and/or assisted living expenses.
• The amount used to pay for long-term care expenses is deducted from the death benefit, and any part of the death benefit that is not used to pay for such costs is paid to your beneficiaries as life insurance proceeds.

One type of coverage bundles a long-term care insurance policy with a whole life insurance policy. This strategy may be done with a single upfront premium, a set of premiums for a fixed term, or ongoing premiums.

The cash value is invested and liquid after surrender charges, and the policies generally will provide a fixed interest rate for cash value growth.

These hybrid policies try to eliminate some of the friction points of long-term care insurance, such as:

• Premium hikes,
• Limited benefit periods,
• Worries that you may be rejected during the underwriting process, and
• The fact that if you never use your long-term care coverage, you see no return on your premium.

You can avoid premium increases by paying a one-time premium or a guaranteed schedule of premiums for a specific period.

Some policies lock costs in at the start, and you can sometimes get an optional continuation of benefit rider that would continue paying for long-term care benefits even if the death benefit is depleted.
 
Is it good for your situation?

A blended life insurance/long-term care policy costs more, but there are potential advantages that may make this additional cost worth it for your situation. 

You have some earmarked, guaranteed funds to help pay for any needed long-term care services. If you don't need long-term care services, your beneficiaries receive the unreduced death benefit.

In addition, universal policies typically charge a premium that is guaranteed to at least maintain the basic benefit, although it may not be enough to build cash value. That eliminates the problem of rising rates on long-term care insurance that prompt many people to shy away from buying this type of coverage. 

If you decide to buy a blended life insurance/long-term care insurance policy, be sure you understand the long-term care benefits it would provide. Questions you may want to ask include:

• Exactly what type of long-term care services would the policy pay for in-home care? Assisted living? Adult day care? Nursing home care?
• How does the policy determine the amount of long-term care benefits it would pay? For example, does the policy pay a percentage of the total death benefit, or does it pay a percentage of the death benefit monthly?
• Can you add inflation protection coverage?
• Are there any conditions under which premiums could increase?
• Is the policy tax-qualified, so that long-term care benefits won't be taxed as income?

Every person's needs vary, but if this type of dual long-term care and life insurance coverage suits your needs, you're able to buy two types of insurance protection in a single policy - and with a single premium.