Long-term care, life insurance, annuities part of new hybrid policies

Have you neglected planning for long-term care often uncovered by Medicare or health insurance? If so, you have more choices these days.

Straight long-term care insurance could rise in price just when you need it or perhaps, never get used. However, you might be eligible for a life insurance/long-term care policy or a long-term care annuity.

In fact, Palm Beach insurance broker Peter Bono says he is converting clients with certain annuities into these newer offerings. They are attractive, he says, for someone whose annuity had large taxable gains. Reason: Thanks to newer regulations, you generally can tap these new hybrid policies, provided that contracts contain appropriate language, tax-free for long-term care.

In Florida, expect to pay a median of $83,950 annually for a private room in a nursing home, $41,184 for a home health aide; or $31,950 for a private, one-bedroom assisted living facility, according to Genworth Financial.

So how do you know which policy to select?

With a long-term care rider on cash value life insurance, you generally can choose a long-term care benefit that pays benefits for a specific term. Whatever is unused passes to your beneficiary when you die.

With a tax-deferred fixed annuity, you may invest a lump sum with the life insurance company. A certain amount of the cash value may be tapped for long-term care benefits. If you don’t use those benefits, you can either withdraw your funds or obtain periodic income for life.

Benefits on either of these are likely not as comprehensive as straight long-term care insurance. However, experts say the long-term care benefits are apt to be more comprehensive on hybrid life insurance policies than on hybrid annuities.

On the other hand, if you have a pre-existing condition and can’t qualify for long-term care insurance, the underwriting for an annuity/long-term care hybrid likely won’t be as tough, according to Bono.

Life insurance policies, coupled with either long-term care or chronic illness riders, account for 6 percent of the market, says LIMRA in Windsor, Conn. But annuity/long-term hybrids are newer. On an annuity, expect to give up 0.75 percent to 1.25 percent of your interest annually, depending on your age, for a long-term care rider, says Jesse Slome, executive director of the American Association for Long-term Care Insurance in Los Angeles. Life insurance/long-term care costs are priced into your policy premiums and/or benefits.

In either case, you could lose if you withdraw early. Annuities may have both an IRS penalty if you withdraw before age 59½, as well as surrender charges if you withdraw early — often within the first seven years. On a life insurance hybrid, expect at the very least, to lose earned interest upon early withdrawal.

These programs can be attractive if you have lazy money — say $400,000 to $500,000 sitting in a bank account, Slome says. “What you have to do is put in enough now so that in 10, 15 or 20 years, you have meaningful coverage.”

Long-term care life insurance and annuity hybrids are complex, and the benefits may not be enough to fund your care. Inflation may erode the buying power of your long-term care benefit. Consult with your tax adviser. Earnings on your annuity, at least, may be taxed if you don’t use the long-term care benefit. And always check the financial strength of the insurance company you’re considering. The strongest are rated “A plus plus” by A.M. Best.