If you’re re-evaluating how much, and what types, of insurance you need in 2022 and beyond, you are not alone. The global pandemic brought many topics to the foreground that were often being pushed aside in the past and finding the right insurance coverage was a big one. While you may be focusing on healthcare insurance options, don’t forget to evaluate your life and long-term care insurance options too, no matter what age you are.
We have had an increase in clients, both younger and older, that actively want to meet with us to start a financial plan, or evaluate their existing ones, and many were not shy to share that the pandemic was a big factor in the timing of these meetings. However, when it came to insurance, it was more common that we would be the ones approaching them with questions about their coverage during these meetings, but as soon as we started the conversation, clients quickly understood the importance of insurance and were eager to find the right solutions for them to cover gaps.
According to a study done by Urban Institute, even though half of adults turning 65 today will develop a disability serious enough to require assistance with daily activities of living, only 11% of them have a long-term care insurance policy that will help pay for it.
Where to start: A gap analysis
When we meet with new clients, or existing clients going through a life transition, we include a “gap analysis” as part of the evaluation when working on updating or creating a plan. During a gap analysis we can work with clients to clarify what kind of coverage they already have, pinpoint areas that are lacking in coverage, and start a conversation about what options are available to them to help address the gaps.
The goal during these meetings is to determine if you have coverage for any potential “catastrophes” in the future and provide an objective second opinion. As we like to say, it’s something that you hope you never have to use, but you’ll be glad to have it when you do.
While traditional life or long-term care insurance is something people are usually familiar with (at least by name), hybrid insurances are a newer option that provides more flexibility and are increasing in popularity among clients who are looking for insurance that can adapt as their lives and situations change. There are multiple types and names for these insurance products, but we’ll focus on two: hybrid long-term care insurance and living benefit life insurance.
What is hybrid long-term care insurance?
A hybrid long-term care policy merges the death benefit of life insurance with a long-term care policy. This coverage lets you have access to parts of your life insurance benefits to pay for professional help when you are no longer able to care for yourself. These policies are usually designed for maximum long-term care benefits. For the long-term coverage to apply, you must meet your insurance provider’s qualifications for benefits, which are usually the “activities of daily living” (ADLs), a term used to describe fundamental skills needed to care for yourself on your own. You also won’t be able to use the coverage for costs usually covered by your normal health insurance such as surgeries, regular check-ups, and prescriptions.
This kind of hybrid insurance allows you to pivot to use the benefits when you need it and also allows the flexibility to keep the costs of care from negatively impacting your estate, or your legacy to heirs or charity.
For some, having individual coverage for life insurance and long-term care insurance separately, while also protecting your estate assets, might not be financially feasible; a hybrid insurance plan might be a more cost-effective solution.
Pros and cons of hybrid long-term care insurance
Hybrid insurances have started to gain so much popularity, that many of the big-name insurance companies who had previously started to back away from life and long-term care insurance have re-entered the market with hybrid coverages. While we have been focusing on hybrid long-term care insurance, there is also living benefit life insurance, but the hybrid has been much more popular with our clients.
One of the reasons hybrid long-term care insurance is more popular is because you only have to pay for a set time period. You also have the option to exchange your policy for the cash you’ve already paid into it if you no longer want/need the policy (surrender charges may apply). If you never end up using the long-term care benefits, then your beneficiaries will receive a death benefit.
Living benefit life insurance however, while it still allows for the flexibility of using your policy for long-term care, puts the life insurance need first, and resembles a more traditional life insurance policy. This means that you do not have a set payment period; you would be paying the same way you would for a whole-life insurance policy, and that is a big factor for some choosing hybrid long-term care insurance as their preferred hybrid plan - especially for younger folks.
So, what’s the catch?
The cost of hybrid long-term care insurance is not a set number, and you will find different prices depending on your age, health, insurance company, and other factors, which could end up being more than a traditional insurance plan. Similar to traditional life insurance, these long-term care riders must be elected specifically when the policy is first issued and cannot be added later to an existing policy.
Is hybrid long-term care insurance right for you?
While hybrid long-term care insurance has a lot of flexibility and benefits, it’s not the best insurance for everyone.
If you’re on a group insurance plan through your employer, a hybrid long-term care insurance plan is likely to be more expensive and most employer-based insurance programs only cover you while you’re employed there; coverage ends when you leave.
Long-term care insurance (whether hybrid or traditional) is stricter in its health screening and underwriting process than other types of insurance. Depending on your health and/or age, coverage may be very expensive or you may be considered uninsurable.
Make a date with yourself
As it is with all insurance, the “best” choice for you is dependent on the unique factors of your life. But that makes it even more important to sit down and review your coverage on an annual basis, either with a professional, your family, or just by yourself. Insurance can be tricky, and there are changes every year, whether it’s rules and regulations, or your own personal life. Ensuring that your insurance is adapting and changing to match your priorities as you go through life’s transitions is key to help give you peace of mind.
Adam W. Robert, CFP® of Clute Wealth Management in South Burlington, VT and Plattsburgh, NY, an independent firm that provides strategic financial and investment planning for individuals and small businesses in the Champlain Valley region of New York and Vermont. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.