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There’s a good chance you’ll need long-term care as you age. But if you’re like many Americans, you likely don’t have a plan to pay for this sort of care.

Americans are increasingly concerned about how they will pay for long-term care, according to a recent study by LIMRA, an industry-funded financial services research group. That worry has grown from 12% in 2019 to 37% in 2021. According to the study, six in 10 Americans would consider a combination life insurance policy—a life insurance policy with a long-term care component.

Although about half of adults turning age 65 today will develop a disability that is serious enough to require assistance with daily activities of living, only 11% have long-term care insurance coverage that will help pay for the cost of care, according to the Urban Institute. Often, people don’t recognize the need for this sort of coverage because they underestimate the cost of care. And they mistakenly assume that Medicare and health insurance will cover long-term care.

Plus, the cost of long-term care insurance can be a deterrent to getting coverage. “Traditional plans have a bad rap because there have been so many hikes in premiums,” says Matthew Sweeney, life and long-term care specialist with Coverage Inc. in Virginia. “When people hear ‘long-term care insurance,’ they say, ‘I’m not interested.’”

The idea of paying hefty premiums for coverage they might not need leaves a bad taste in people’s mouths. But there is an alternative to use-it-or-lose-it traditional long-term care insurance. Hybrid life insurance products provide long-term care coverage if there is a need, or a death benefit if the policy isn’t used to pay for care.

Before opting for one of these products, understand what they are and whether they’re right for you.

The High Cost of Long-Term Care

Long-term care costs are expensive. Insurer Genworth’s 2021 Cost of Care Survey estimated the median monthly costs for care in multiple locations across the U.S.

Median monthly cost of care

According to Genworth, in 2021 the median annual cost of a private room in a nursing home was $108,405. And the cost of care is on the rise.

Altarum, a nonprofit consulting and research organization, estimated that more than half of Americans entering their twilight years will need long-term care averaging $266,000 per person for about two years for a self-care disability, which is a disability that lasts at least six months and causes the person to have difficulty bathing, dressing or moving in the house. More than half of that money will be spent out of pocket.

For those who need a high level of care, the average length of care is 3.9 years, according to the Bipartisan Policy Center. If you fall into that category, your care could cost you several hundred thousand dollars.

Then there’s the added stress and burdens put on family members who often provide long-term care.

Why You Can’t Count on Medicare or Medicaid to Help

Medicare—the government health insurance program for adults age 65 and older—will pay for short stays in skilled nursing facilities for rehabilitation or therapy services after a hospital stay. It will not pay for long-term care, which is assistance with what are called the “activities of daily living”:

• Bathing
• Dressing
• Eating
• Using the toilet
• Transferring (to or from a bed or chair)
• Caring for incontinence

This is the type of care that someone who is experiencing physical or mental decline might need. It can be provided at home, through community-based services such as adult day care or in a facility.

Medicaid—the joint state and federal health care program—will cover the cost of long-term care at home and in skilled nursing facilities. It currently is the primary payer in the nation for long-term care services. However, you must have limited income and assets to qualify for Medicaid. Income requirements vary by state, but, typically, your assets (excluding your home and one car) can’t exceed $2,000 as an individual or $3,000 as a married couple.

Unfortunately, there may be little awareness of these downsides. Many people plan to rely on Medicare or Medicaid to pay for long-term care, according to a 2018 study by Lincoln Financial Group and Versta Research.

How Insurance Can Help

Long-term care insurance can be used to pay for assistance when the policyholder can’t perform two of the six activities of daily living or has cognitive impairment, says Tim Dona, president of Newman Long Term Care, an independent insurance brokerage firm in Minnesota. It covers the cost of care at home, in adult day care, in assisted living facilities and skilled nursing facilities.

Most long-term care policies also will cover modifications to your home to make it easier to remain there to receive care, Dona says.

The amount of coverage a policy will provide will depend on the benefit period and benefit amount you choose. The average benefit period policyholders choose is three years, Dona says. And a typical plan pays out $3,500 to $5,000 a month in benefits. The maximum benefit is then based on the monthly benefit amount and benefit period. For example, a long-term care policy with a $5,000 monthly benefit and a three-year benefit period would have a maximum benefit of $180,000.

Depending on how long you need care and how much it costs, long-term care insurance can help cover some or even all of the cost of care.

But traditional long-term care policies are a use-it-or-lose it proposition. “If you don’t need long-term care, you’re left with that feeling that all of those premiums were for nothing,” Dona says.

How Hybrid Insurance Solves the Use-It-or-Lose-It Problem

Life insurance policies that include a long-term care benefit can alleviate the concern about paying for long-term care insurance that you may never use. These combination life insurance or hybrid life insurance policies can be used to pay for long-term care expenses and will pay a death benefit when the insured person dies.

Combination life insurance policies have grown in popularity over the years, but LIMRA reported that the types of policies actually decreased by 7% in 2020. There were 421,000 combination life insurance policies sold that year.

Types of Hybrid Life Insurance Products

Life insurance policies that include long-term care benefits are permanent life insurance policies, not term life policies. There are a few different types of these long-term care hybrid products.

Linked benefit life insurance

A linked benefit insurance policy is a true hybrid policy that links a life insurance policy with a long-term care policy. Typically, the long-term care benefit amount is equal to about five times the premium you pay, Dona says. For example, a healthy 55-year-old man who made a $100,000 lump sum premium payment could get long-term care benefits worth nearly $523,000. The death benefit would be $174,000, based on a quote provided by Newman Long Term Care.

According to the American Association for Long-Term Care Insurance, 84% of long-term care protection purchased in 2019 was linked-benefit coverage. Just 16% was stand-alone long-term care insurance.

Buying a long-term care rider on a life insurance policy

When you buy life insurance, you may have the option to add a long-term care rider (it can’t be added later). Generally, these long-term care benefits are not as robust as with a traditional long-term care policy or linked-benefit policy, says Craig Roers, head of marketing for Newman Long Term Care.

“This approach might be good for someone where life insurance is more of a concern than long-term care insurance, as the long-term care is sometimes a ‘by the way,’” he says.

Both of these products will pay out through reimbursement of the actual cost of care or an indemnity model that pays a certain cash benefit regardless of the actual cost of care. When you use the long-term care benefit, the death benefit is reduced. However, most of these policies still offer a death benefit of $15,000 to $20,000 if you use all of the coverage for long-term care, Dona says.

Chronic illness or critical illness rider on life insurance

By adding a critical illness or chronic illness rider when you buy life insurance, you can later take money from your own death benefit to pay for care if you have a chronic illness that will last for the rest of your life.

“It would not cover something like extended care needed due to a hip replacement, but true long-term care insurance would,” Roers points out. These riders use the indemnity model and pay you a lump sum if you develop an illness that qualifies.

Pros of Hybrid Life Insurance

In addition to paying a death benefit if long-term care isn’t needed, hybrid life insurance products have other features that can make them more attractive than traditional long-term care insurance.

Premiums are consistent

The premium is guaranteed on hybrid products and won’t increase over time, Voegele says. This appeals to consumers because premium increases (sometimes very high) were common with traditional long-term care insurance policies in the past. Now insurers are able to price long-term care policies more accurately, so rate increases are less likely, according to the National Association of Insurance Commissioners.

Flexibility

Hybrid life insurance/long-term care products offer flexible premium payment options. You can make one lump-sum payment or pay premiums over time, Dona says. Traditional long-term care policies typically don’t offer a single premium payment option.

Could be easier to get than long-term care insurance

It can be easier to qualify for coverage because the underwriting can be less stringent with a hybrid policy than a traditional long-term care policy, Voegele says.

Money can go to pay a family caregiver

A hybrid policy might allow you to pay a family member who provides care for you, Dona says. If it uses an indemnity model that pays cash rather than reimbursement for the actual cost of care, you could use that cash to pay a family caregiver. This isn’t an option with traditional long-term care policies, which pay claims by reimbursement only.

Cash value

Permanent life insurance policies build cash value, which you can tap to cover expenses other than long-term care. Stand-alone long-term care insurance policies don’t have cash value.

Cons of Hybrid Life Insurance

A hybrid policy may not make sense for you in other aspects.

Not the best bang for your buck

The biggest con of a hybrid product is that you’re not getting the best coverage for your money, Dona says.

“You don’t need to pay the insurance company to bundle them for you,” he says. If your top concern is long-term care, you’ll get more coverage for your money with a stand-alone long-term care policy. And it will be cheaper than a hybrid policy because you’re not paying for the life insurance benefit.

For example, a couple age 55 would pay $5,532 annually for a linked-benefit policy with a $150,000 death benefit and $330,000 long-term care benefit, Dona says. However, they would pay $4,000 annually for a stand-alone long-term care policy with a $330,000 benefit.

Longer elimination (waiting) periods

Hybrid policies have limited ability to be customized for individual needs, Voegele says. For example, the period you must wait before benefits kick in is typically 90 days with hybrid policies. Traditional plans can have elimination periods that range from 30 days to two years, he says. A longer period can lower the premium.

Long-term care payouts can reduce cash value and death benefits

Long-term care payouts can substantially reduce cash value or the death benefit of a hybrid policy. If you bought the policy because you have loved ones who will need the death benefit, that benefit won’t be there if you have tapped all the money for your care.

May not include inflation protection

Hybrid policies don’t always include an inflation protection option, Roers says. This option increases the cost of a policy, but it allows the value of the policy to increase with the rising cost of long-term care.

Fewer tax benefits

The tax benefits of hybrid policies might not be as generous. Both hybrid and traditional long-term care insurance payouts are tax-free. However, if you’re self-employed, you can deduct the cost of long-term care insurance premiums. With a hybrid policy, you can’t deduct the full premium—only the portion that goes toward long-term care coverage, Roers says.

Not eligible for Medicaid programs

Traditional long-term care policies often are eligible to be part of state Medicaid partnership programs. With a partnership policy, you don’t have to spend down all of your assets to qualify for Medicaid. Hybrid policies are not eligible for these partnership programs, Roers says.

Also see: Long-Term Care Deduction Limits

How and When to Buy a Hybrid Insurance Policy

Lincoln Financial and OneAmerica are the top two providers of hybrid life insurance policies, Dona says. Other insurance companies that sell this type of coverage include Nationwide, Pacific Life and Securian Financial.

Most people who buy stand-alone long-term care coverage tend to be in their early 50s. Those who buy hybrid policies tend to be older, Dona says. Some hybrid life insurance carriers will even issue policies to people up to age 85.

One reason hybrid insurance policy buyers tend to be older is because these products were originally designed to be purchased with one large lump-sum payment of $50,000 or $100,000, Dona says. Older adults are more likely to have that sort of cash in savings or an annuity.

It also can be easier to qualify for a hybrid policy than a stand-alone long-term care policy if you’re older because the underwriting is less stringent. Insurers tend to be more relaxed about the medical conditions they’ll accept and still issue a policy, Dona says. Still, premiums will be lower if you’re younger and in good health.

When applying for a policy, you’ll have to fill out a questionnaire about your health and have a phone or face-to-face interview. The insurer might check your medical records and prescription history, and might require a life insurance medical exam, Dona says. If your health is an issue, you might be able to buy an annuity with a long-term care benefit because you will only have to answer a series of questions. This option does not include a death benefit, though.

The Cost of Coverage

You’ll pay more for long-term care coverage with a hybrid policy than with a stand-alone long-term care policy. However, hybrid policies can be cheaper for women, Dona says. Men pay more because the life insurance component is more expensive for them.

Here’s a look at the cost for three different types of policies offered by Thrivent:

• A single premium hybrid policy
• A hybrid policy that the policyholder pays for up to the age of 95
• A long-term care insurance policy with no life insurance benefits

Let’s take a look at different long-term care insurance options offered by Thrivent.

Initial insurance costs and values at age 55 for males

Projected values of the above policies for males at age 82

Initial insurance costs and values at age 55 for females

Projected values of the above policies for females at age 82

Here are costs for single premium and recurring premium coverage from OneAmerica.

Single premium linked-benefit policy from OneAmerica

Recurring premium linked benefit policy from OneAmerica

Other Ways to Use Life Insurance to Pay for Long-Term Care

If you already have a permanent life insurance policy you might be able to convert it to a hybrid policy using a 1035 exchange, says Sweeney of Coverage Inc. You must qualify health-wise for the new policy, and you must have built up enough cash value in the existing policy to fund the new policy.

You also could use a cash value life insurance policy to pay for long-term care. You can take a loan, withdraw cash or fully surrender the policy for the cash value.

You could sell a permanent life policy to a life settlement broker for cash if you’re age 65 or older. You’ll get less than the death benefit but more than the cash surrender value. Be careful because the payout might be taxable.

If you have a term life policy, you might be able to access a portion of the death benefit while you’re still living to pay for care. Term policies typically have an accelerated death benefit rider that lets you use up to 50% of the death benefit amount if you’re terminally ill, Sweeney says. The payout might be taxable, and it will reduce the death benefit that your beneficiaries receive.
Before you use any of these strategies, read the fine print of your insurance policy. Sweeney recommends talking to your insurance agent to understand the implications and review the downsides.

And if you’re considering a hybrid policy or a stand-alone long-term care policy, work with an agent who specializes in long-term care coverage. One size certainly doesn’t fit all. So you’ll need an expert to help you weigh your options.

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