According to AARP, 50% of those over age 65 will need to pay for personal care for two years or less. Since Medicare does not pay for nonmedical help (average cost ≈$140,000 if you paid from your own resources), long-term care insurance was developed as a funding option.
The reality of long-term care insurance. While it sounded nice, in actual fact, a sizable majority discovered they were not able to use the policy. Their need for personal care that “triggered” the payout (e.g., bathing, dressing, toileting) came on quickly, often very late in their lives. When filing a claim, they had to pay for care out of pocket during a 1- to 12-month waiting period (called an “elimination period”). By the time the elimination period was up, they had paid a significant amount for care —in addition to the premiums they had paid in prior years—and received very little from the policy before they died. It was a poor investment.
Now there’s hybrid insurance. This type of policy combines life insurance and long-term care. It functions much like traditional long-term care insurance with a few key differences.
- A need for personal care triggers eligibility for the benefit. With some policies, a formal dementia diagnosis or cognitive (thinking) impairment can also be a trigger.
- There is usually an “elimination” (waiting) period. The shorter the period, the higher the premium.
- Some form of medical review is required. The premium is based on your current health and abilities.
- Rather than a monthly premium, you usually pay one lump sum (e.g., $60,000–$100,000). Or perhaps several installments. The payments are few and large.
If you never use the long-term care portion, the policy acts a bit like life insurance. It pays a guaranteed death benefit to your heirs (beneficiaries). Many policies have a “return of premium” clause so that recouping the initial investment is guaranteed.
A hybrid policy is useful as a way to avoid the annual rate hikes of premiums paid on a monthly basis. It is not a good option if you have no need of life insurance (e.g., no heirs to worry about). And it works as an investment only for those who have large amounts of money, perhaps from a recent house sale when downsizing or in a CD not earning much interest.
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