The long-term-care insurance industry is bleeding. Can hybrid policies save it?

Traditional LTC insurance policies are in trouble—the industry has had to spike premiums as it struggles to make good on guaranteed benefits to its customers—at a time when interest rates are near zero and insurers can’t depend on higher rates to support benefits. For these reasons, the issuance of new long-term-care policies fell from 750,000 policies per year in 2002 to just 55,000 in 2019.

It’s unclear if hybrid policies will change all this, but they have definitely taken over the market. Hybrid long-term-care policies bundle long-term-care insurance with variable insurance or annuities.

“Last year at Raymond James, we probably did $1.5 million to $2 million in traditional policies and $250 million in hybrid,” says Renee Larson, vice president of life and long-term-care sales at Raymond James’s Producers Choice Network division. “In the past three months, we’ve seen 35% to 40% of LTC policies sales come from hybrid products sold by advisors who either haven’t written a policy before or haven’t written one in the last five years. So the market is just increasing exponentially.”

According to the American Association for Long-Term Care Insurance, hybrid LTC policies now account for as much as 30% of the overall long-term-care market.“There are all kinds of statistics out there that say that clients want to have a long-term-care conversation,” Larson says.  “I think these products make it a little bit easier. Hybrid products have guarantees. Clients know their premiums aren’t going to increase and they can plan for that.”

Advisors know that a client’s long-term-care expenses can derail a “comfortable” retirement for many families. But while an estimated 7.5 million people have some type of long-term-care coverage today, 42 million Americans between the ages of 55 and 64 (the prime age for buying a policy) do not, according to the American Association for Long-Term Care Insurance.

Adherents see hybrid policies as the answer to many of the drawbacks traditional long-term-care policies suffer from, including the recent need to hike the rates on them by as much as 50% in one year. Traditional policies are true “use it or lose it” insurance and require policyholders to enter a nursing home to use the benefit (they must provide receipts, which they’re reimbursed for). Insurance covering at-home LTC is available only through an additional rider.

In sharp contrast, hybrid policies lock in premiums for life and provide a death benefit. Policyholders have the flexibility to pause premiums and can use the LTC benefit for at-home care, assisted living or nursing home care via automatic payments. On some policies, receipts for reimbursements are no longer necessary.

“These are major distinctions between the traditional LTC market and hybrid market,” says Heather Deichler, senior vice president of Lincoln National’s MoneyGuard Product Management. “Our rates are non-cancelable. We can’t ask for rate increases.”

In mid-February, Lincoln National introduced its latest hybrid product, MoneyGuard Market Advantage. A variable universal life (VUL) insurance policy, it offers a long-term-care rider that helps cover qualified long-term-care expenses. The policy provides a guaranteed level of protection and offers the possibility of growth through 40 different investment options from leading portfolio managers and customizable or turnkey portfolios.

The product, says Deichler, “allows consumers to acquire guaranteed protection at an earlier age with the potential for increased benefits over their lifetime.”

The VUL policy delivers both upside and downside protection with annual lock-ins and a guaranteed minimum level of death and long-term-care benefits. Any growth is tax-deferred and will be income tax-free for qualified expenses, including care from family members, with benefits designed to better support non-facility care, Deichler adds.

In a recent Lincoln survey, 54% of financial professionals said clients avoid talking about long-term care because they think they can’t afford it. However, with the newest hybrid products, including Lincoln’s MoneyGuard, customers have the flexibility to fund their policy with a single, up-front payment or to pay over time and adjust when necessary.

“Consumers tend to wait until they are in their 50s or 60s before beginning their long-term-care planning,” Deichler says, “but with costs rising, it is important to start planning for long-term-care needs when they are younger and healthy.”

“Everyone has a parent who needs long-term care, but no one thinks it will be them,” says Todd Zeidenberg, president of Allied Wealth Partners in Guilford, Conn., who begins to discuss long-term care with clients when they reach age 50.

According to the U.S. Department of Health and Human Services, almost 70% of Americans turning 65 today will need some type of long-term care and 20% will likely need care for five or more years. Given that annual LTC costs can extend into the six figures, that’s a daunting prospect for many retirees.

According to Zeidenberg, “When the client turns 55, we start saying, ‘We really need to address this now.’ We also do meetings with kids and family members, which really unifies the advisor and client in life-centered financial planning.”

He says hybrid products give him the flexibility to provide a range of solutions. Recently he showed a client how a traditional policy would have cost $3,000 per month for the rest of the client’s life, while a hybrid product would cost him $10,000 per year for 10 years.

Larson says that more and more, “we’re finding hybrid products are morphing into flex pay products, and carriers are lengthening premium models. They can go out a lifetime. So if you compare a lifetime hybrid premium to traditional, they’re competitive.

“We’re also seeing a shift in younger clients being interested in hybrid LTC,” she says, such as clients in their mid-40s.

While some insurers are offering low-load products, hybrids have also increased commission payouts, Larson adds. “The payouts on hybrid are based on the high up-front single premium payment, and most products pay 7% to 9% commissions.” By contrast, the payouts for traditional long-term-care policies are around 65% of the annual premium, she says, adding that it’s a larger commission percentage but on a much smaller premium amount.

So for a single-premium hybrid product costing $100,000, a 7% commission would pay a rep $7,000, while first-year traditional premiums of $4,000 would pay a 65% commission of $2,600.

The Covid-19 pandemic and the ensuing nursing home crisis have also spurred the consumer desire for in-home care, which hybrid policies cover, says Jesse Slome, founder and president of the American Association for Long-Term Care Insurance. “What Covid has clearly done is said, ‘You’ll be so much better off at home.’ The shape of LTC going forward will focus much more on the ability to remain in place as people age and need care, and that’s what people want clearly. We all want it. No one wants to go into a facility.”