While hybrid policies are great for some, other clients are talked into coverage they don’t actually need. “Many people don’t need the life insurance,” says Derek Holman, co-founder and managing director of EP Wealth Advisors, a fee-only certified financial planner in Torrance, Calif. “This makes the premiums more than a traditional stand-alone LTC policy [and] can create more risk if you decide you no longer need the policy down the road.”
He suggests advisors help their clients weigh all their options, including self-insuring (i.e., doing without LTC coverage). “I have seen people purchase LTC insurance [because] they’re told they need it,” Holman says, even if they don’t. In any case, he recommends comparing at least three quotes before choosing any policy.
With hybrid policies, the details can be tricky. In many cases, payouts for LTC benefits reduce a hybrid policy’s cash value or its death benefit. “This could leave little or no money to heirs if care is needed for an extended period of time,” says F. Michael Zovistoski, a managing director at UHY Advisors NY in Albany, N.Y. “Consequently, if there is a true death benefit need, a hybrid policy should not be the only product [purchased], as it may not be available if the long-term-care payments are substantial.”
Two Types Of Hybrids
Bill Nash, the Charlotte, N.C.-based senior vice president and head of MoneyGuard Distribution at Lincoln Financial Group, a top seller of combination products, explains that, broadly speaking, there are two flavors of LTC hybrid products.
First, there are those that can spend down an entire death benefit for LTC expenses, possibly leaving nothing for heirs. But there are also those with an “extension of benefits” rider that can continue LTC payments beyond the limits of the death benefit. “The extension rider allows LTC benefit payments to continue after the entire death benefit has been paid, providing additional funds of potentially two to three times the death benefit,” says Nash.
Tax Considerations
Another consideration is that, to date, stand-alone LTC insurance premiums are generally tax-deductible. That may not be the case with all hybrid policies. “The IRS code is unclear as to if premiums paid on hybrid plans are tax deductible or not, and the determination will need to be made on specific facts and circumstances,” says Zovistoski. “Potential purchasers should consult with their tax advisors prior to purchasing the hybrid policy to see how much, if any, of the premiums may be tax-deductible as a medical expense.”
Comparing Costs
The tax implications aside, many hybrid plans charge high up-front premiums, whereas traditional plans typically charge a monthly, quarterly or annual premium for the life of the policy. Lately, though, that’s been changing. A growing number of hybrid-policy issuers are offering extended payment schedules.