Hybrid insurance policies cover you while you're living and after you're gone

Marcus Pickett

Hybrid life insurance plans combine long-term care insurance and whole life insurance under a single policy. These plans, also known as "asset-based" life insurance, allow policyholders to coordinate their retirement planning and financial safeguards. The long-term care insurance component protects financial assets from being drained by long-term care expenses, while the whole life insurance component adds an important retirement asset and funds for the beneficiaries.

The basics

Long-term care insurance covers the high costs of nursing home care or at-home skilled nursing care if the policyholder no longer can care for himself. Such care is not covered by Medicare and is covered by Medicaid only if your assets are severely depleted.

One drawback that discourages many from buying long-term care insurance in the first place is the fact that, if they never need this kind of care, they've essentially wasted the premiums, according to the American Association for Long-Term Care Insurance (AALTCI). A hybrid policy combines long-term care insurance with life insurance -- so, if you never need the long-term care benefits, you'll at least be able to leave a legacy for your loved ones.

The basic structure of a hybrid plan can take one of a few different forms. Someone can buy a comprehensive hybrid policy that combines both long-term care insurance and whole life insurance. Some companies let you buy a basic permanent life insurance policy and then add a long-term care insurance rider for an additional cost. Nationwide, for example, offers a rider that lets you use as much of the policy's death benefit as you need for long-term care, should you need it. Keep in mind that using the policy's benefits for long-term care will reduce the amount available to your beneficiaries upon your death.

The coverage level for long-term care and the death benefit are often not the same. The policyholder might, for example, purchase a policy that offers $200,000 in whole life insurance and $400,000 in long-term care coverage, according to AALTCI. The policy offers a higher limit for long-term care coverage, but the whole life death benefit begins to dwindle as soon as long-term care benefits are paid out.

Another type of hybrid insurance pairs long-term care coverage with an annuity, rather than with whole life insurance. Buying an annuity is basically making a contract with an insurer. You pay premiums, the money is invested, and you receive a guaranteed payment in the future while you're living. For retirees who may need the money more than their beneficiaries would, this may be an attractive option. However, according to AALTCI, only a few companies offer this type of policy.

Payments

Hybrid insurance policies can be paid for just like other life insurance policies -- via regularly scheduled premiums. Or, according to AARP, a policyholder can pay one large lump sum upfront. A retiree with robust savings likely will do best with a single-premium policy, according to AARP, while a middle-aged person with less in retirement savings may prefer a recurring-premium structure.

Pros and cons

The idea of a single policy insuring two risks seems attractive -- and hybrid policies may convince many who otherwise wouldn't to buy long-term care insurance. However, AARP points out, hybrid life insurance may not do a thorough job of covering both risks if both happen to occur -- if you need to cover years of long-term care expenses as well as leave a death benefit for your loved ones, for example. Using the policy's benefits to cover several years in a nursing home could drain it, leaving no death benefit.

Moreover, adding a long-term care insurance rider to a life insurance policy costs extra. Your premiums still would be less than they would be if you bought separate long-term care insurance and life insurance policies. But, according to AARP, that savings would be small. The customer, AARP says, must be educated and discerning -- or have an agent help you navigate the complexities.

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