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Do I Need A Hybrid Long Term Care Policy?

Kevin Wenke

Kevin Wenke

Owner at Decision Tree Financial. CFP. CLU

After researching the costs of long-term care insurance and noticing the high premiums you may have come across the term “hybrid long term care insurance policy,” and wondered to yourself, “Do I Need A Hybrid Long Term Care Policy?”

Generally, long-term care insurance protection can be purchased in two ways:

Traditional Long-Term Care Insurance: A stand-alone insurance policy that allows people to pay predictable premiums for the promise that an insurance company will provide financial support if long-term care services are required in the future

Hybrid Long Term Care Insurance: A policy that provides a primary benefit that is not long-term care, typically a death benefit (life insurance with long-term care) or lifetime income (an annuity with long term care), where the insurance company also promises to provide long-term care benefits as well, if they are needed.

Unlike qualified long-term care insurance, hybrid (or linked-benefit) long-term care insurance does not have the same tax incentives to purchase them.  That doesn’t mean that they do not have tax advantages, they just aren’t as robust when isolated from your other finances.

The biggest tax advantage of hybrid long term care insurance is any benefit paid out from these policies and used to obtain long-term care services are 100% income tax free!

This provides a unique planning opportunity to people who have existing life insurance or annuity contracts that have appreciated in value and they no longer want that contract but would like to have long-term care coverage.

You see, when you surrender or “cash in” a permanent cash value life insurance policy or annuity, the money you had contributed (your payments) to the policy are given back to you tax free as a return of premium, if you paid that premium with money that was already taxed.

However, any appreciation (gains) the contract realized are 100% taxable when you withdraw them.

This is how you can get the government to pay for your long-term care with money you would have lost to taxes if you cashed in an old policy.

By using a tax strategy called a “1035 exchange,” you can move the cash value in the existing policy into a hybrid long-term care policy.  When the proceeds from the new hybrid policy are used for any long-term care services are then 100% TAX FREE!

Unlike qualified long-term care, if you never need long-term care services (or use only a portion of the benefits available) the hybrid long-term care policy’s beneficiary will still receive its full available value. That means any “death benefit” of a life insurance or annuity contract would still be paid out.

How much does hybrid long-term care insurance cost?

For a Hybrid policy you are likely to pay more than a standalone long-term care policy. As per the American Association of Long-Term Care Insurance (AALTCI) report the price of two leading providers of linked-benefit hybrid policies for a $5,000 monthly long-term care benefits for three years would be following:

  • 55-year-old male: $3,625 to $5,010
  • 55-year-old female: $3,400 to $4,550

A hybrid long term care policy might be the perfect solution for your situation.  There are variables to consider

You can continue learning about all the long-term care questions and answers by downloading my FREE book called The Secret to Long-Term Care Planning .  In this easy-reading eBook I discuss the things you want to know including general information, insurance options, funding sources.

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