Hybrid long-term care insurance

January 22, 2020 10:06 PM

Our financial advisor is suggesting we consider hybrid long-term care insurance. It's essentially long-term care insurance with a fixed cost, with anything leftover after death paid as life insurance. Anyone have any insight on it?

The particular policy he recommended was Lincoln MoneyGuard III
We're a married couple in our fifties, with one teenager. We can afford it. No current health issues.
The quotes we were given were about $45k if paid in full, or $60k over 10 years.

posted by Sock, Sock, Sock, Sock, Sock, Goose! to Work & Money (7 answers total)

I would always query whether it's cheaper to get the insurance yourself rather than through a CFP. Query their fee for sure. Some insurers do actually offer white papers of case studies in the last five years of "normal" line cases and instances of refusal. Your CFP may have this. Something else you can do is ask him if any other clients have this and ask to speak to them.
posted by parmanparman at 11:34 PM on January 22, 2020

According to this article, "Hybrid policies are usually two to three times more expensive than traditional insurance for the same long-term care benefits."

The concept of definitely getting something back might sound appealing, but the basic idea of insurance is that you don't want to use it.

You get homeowner's insurance, but you don't want your house to burn down. You get auto insurance, but you don't want to crash. You get health insurance, but you don't want to get sick. And you may want to get LTC insurance, but you don't want to need that care. If all goes well, you should pay in and get nothing back.

If you want to ensure that you get something back, you will pay extra, and you'd almost always be better off saving that money and investing it yourself.

Paying a lump sum would insulate you from premium increases, but you're probably going to pay a lot extra for that, and premium increases may not be that big a problem.

If you want LTC insurance, you should do a careful comparison to the cost of a traditional policy. If you don't want LTC insurance, you should not purchase it.
posted by Mr.Know-it-some at 6:31 AM on January 23, 2020 [1 favorite]

Another way to look at insurance is as a hedge against a particular risk. Life insurance can be a hedge against the risk of leaving loved ones with a mortgage or other burdensome expenses. Long term care insurance is a hedge against the risk of the increasing cost of nursing home or other forms of care. Humans are not good at evaluating the likelihood of the risk, which is one of the variables that makes buying insurance such a difficult decision. Insurance company actuaries, on the other hand, are very good at evaluating the cost of the risk, which is why insurance costs what it costs.

Your advisor seems to be recommending a product that combines a hedge against risk with an investment vehicle; hence the term hybrid. This may or may not be a good deal for you. That is something you will have to decide.

You might want to ask the advisor why you shouldn't just separate the two functions and (if you do want to invest) make the investment separately. Keep in mind, also, that investments - whatever the vehicle - typically have a reasonably predictable rate of return that enables you to evaluate their risk more objectively. In the case of the hybrid LTC policy, though, the rate of return is tied to your health. That is unpredictable enough that you might not want to bet on it with an investment.
posted by John Borrowman at 8:29 AM on January 23, 2020 [2 favorites]

Re: fees - if the insurance company is giving him a commission, it will not change the premiums for you. Insurance companies build the cost of that into the product, so only changing the insurance company or changing the product is going to change the cost of the premium (excluding any change in premiums after you go through underwriting). Now he may be pushing this product on you because it pays him higher commissions, so it would be good to shop around if you really are interested in this product.

One thing that I think is very important to consider (and is something that insurance companies have underestimated in the past, so I take that to mean there's much uncertainty) is inflation. Health-care costs will increase and you want to make sure that you're not budgeting for today's costs instead of costs 20-30 years from now.
posted by LizBoBiz at 8:51 AM on January 23, 2020

So, it's much harder to get good LTC insurance these days because the companies quickly came to realize that they were not profitable enough. Why is this different? Though I haven't read this particular plan's documents, I'd wager it's not. They're slapping an LTC face on an expensive investment product (they're always expensive).
posted by praemunire at 10:41 AM on January 23, 2020 [2 favorites]

Hmmm, you should trust the people above who may actually know what they're talking about before trusting me. But I can imagine that a hybrid product could be cost-advantaged compared to the two insurance products purchased separately, simply because it lets you/the insurance companies make an either/or bet. That is, with a hybrid policy, you're not buying both LTC insurance AND life insurance, but only whichever ends up applying first. I'm posting that thought mostly so the others who know more can come in and debunk it, if justified.
posted by daisyace at 2:02 PM on January 23, 2020

Best answer: This is not a question with a straightforward answer. I do think your adviser is giving you advice consistent with what most current experts recommend, in that pretty everyone is avoiding straight LTC insurance because most policies have seen massive premium increases before people got to the age where they were likely to make a claim and now they’ve spent thousands on the insurance that they’ll never get back and can’t afford the ever increasing premiums. The hybrid policies avoid that risk by setting a fixed cost, but it costs quite a bit more than current rates for stand alone policies with “normal” inflation assumptions. If the premiums go up at the same rate as they have in the past 10 years, it’s going to be a bargain price.

I looked at earlier version of this plan for my parents and it worked out so that they paid 80k each for about 700k worth of long term care coverage and if they didn’t use it they left more or less the amount of the premium to their kids. In the case where they actually spent 700k in long term care, that’s a great deal. In the case where they didn’t spend anything or spent less than 250k or so, it’s a poor deal because if they just invested same money they have had about that much or more.

If you anticipate having significant assets in retirement of say $2 million+, I think it makes more sense to self-insure. If you have more modest savings it’s really about your appetite for risk and goals. For many people, knowing that they have some financial protection against bankrupting their estate with high end of life costs and being able to leave money to their kids is worth the peace of mind, even if it is probably going to lose money for the average person who buys the policy (like basically every kind of insurance ever).

If your real question is trying to determine if the financial planner is scamming you or if the policy is nuts because it sounds kind of weird, that answer is no. People like AARP, Kiplingers and so on are mostly advocating this kind of hybrid insurance right now and I think Lincoln is far less sketchy than the Genworth product that is the primary other option. It does pay a commission to the financial planner (I think it was 7.5% when I looked into this two years ago). I’m not a fan of how most financial planners live off those fees, especially when they don’t disclose any of it. However, it’s hard to find someone who will work on a straight fee for service basis (which is the only way to ever really be confident they are giving you their best advice without any hint of self-interest). Personally, I recommended that my parents not purchase it but it’s part of a much bigger picture of their entire financial situation and it’s difficult to answer for you.

Good luck.
posted by Lame_username at 9:54 PM on January 23, 2020 [3 favorites]