Comparing Asset-Based (Hybrid) LTC Products vs. Traditional LTC Products

As an insurance agent, it’s crucial to understand the differences between traditional individual long-term care (LTC) insurance and modern asset-based (hybrid) LTC insurance products. Each option offers unique features, and having a clear understanding of these can help you guide clients to the best solution for their long-term care needs.

Traditional Individual Long-Term Care Insurance

Traditional LTC insurance is designed solely to cover long term care expenses, such as nursing homes, assisted living, or in-home care. Coverage is triggered when an individual is no longer able to perform certain activities of daily living (ADLs), such as bathing, dressing, or eating, or when cognitive impairments arise, or they're confined to a long term care facility.

Key Features:

• Pure LTC Coverage: Traditional LTC insurance only covers long-term care-related costs, and it does not provide additional financial benefits outside of that coverage.
• Premiums Can Increase: While traditional policies often start with lower premiums, these are subject to increase over time, making them less predictable. Our office has analyzed numerous inforce policies with premium that has doubled or tripled since the original purchase.
• No Return of Premium: One of the biggest concerns with traditional LTC insurance is the "use it or lose it" issue. If the client never requires long-term care, no benefits are paid, and the premiums paid are generally lost.
• Tax Benefits: Premiums paid for traditional LTC policies may be tax-deductible, and the benefits paid out for qualified care are typically tax-free.

Pros:

• Comprehensive long-term care coverage.
• Typically lower initial premiums than hybrid policies.

Cons:

• Premiums may increase over time.
• No return of premium or financial benefit if long-term care isn’t needed.

Asset-Based Long-Term Care Insurance

Asset-based LTC products combine long-term care benefits with either life insurance or annuities, offering multiple financial advantages. These policies address the concerns of traditional LTC insurance by ensuring that the policyholder’s funds are not lost, even if long-term care isn’t required.

Key Features:

• Life Insurance or Annuity with LTC Benefits: Asset-based LTC products can be structured as either life insurance or annuities, both providing financial value:

  • Life Insurance-Based Asset LTC: Offers long-term care benefits and a tax-free death benefit to beneficiaries if the policyholder doesn’t need long-term care.
  • Annuity-Based Asset LTC: Builds cash value over time and provides long-term care coverage. If long-term care is not needed, the annuity offers access to funds or a death benefit.

• 1035 Exchange Advantage with Annuities: An annuity-based LTC policy can be funded through a 1035 exchange. This allows clients to transfer an existing annuity into an LTC annuity without tax consequences. If the insured goes on claim, any withdrawals for long-term care are tax-free, eliminating the tax burden that would otherwise apply to deferred gains.

• Guaranteed Premiums: Asset-based LTC products typically offer fixed premiums, providing stability over the life of the policy.

• Eliminates "Use It or Lose It" Concern: Asset-based LTC products ensure that even if long-term care isn’t needed, the policyholder or their beneficiaries will still receive value in the form of a death benefit or access to the annuity’s cash value.

• Tax Benefits: Life insurance-based asset LTC policies offer a tax-free death benefit, while both life insurance and annuity-based LTC policies allow tax-free withdrawals for qualified long-term care services.

Pros:

• No "Use It or Lose It" Issue: Clients receive financial value whether they need long-term care or not.
• Dual Purpose Coverage: Provides both long-term care coverage and financial benefits through life insurance or annuity features.
• Tax-Free Withdrawals with 1035 Exchange: Annuity-based products allow for tax-free LTC withdrawals, especially advantageous with a 1035 exchange.
• Guaranteed Premiums: Fixed premiums ensure stable costs over time.

Cons:

• Higher initial premiums compared to traditional LTC policies.
• If long-term care benefits are used, the death benefit or annuity value may be reduced.

Key Differences:

Which Option is Best for Your Clients?

Choosing between traditional and asset-based LTC policies depends on your client’s priorities:

• Traditional LTC Insurance may be ideal for clients focused solely on covering potential long-term care costs, even if they risk losing their premiums if care isn’t needed.

• Asset-Based LTC Insurance is a great solution for clients who want guaranteed value from their investment, whether they need long-term care or not. These products, especially annuity-based ones, offer the added advantage of tax-free withdrawals through a 1035 exchange, making them an attractive option for clients with existing annuities.

Helping your clients understand these options ensures they make informed decisions, offering peace of mind and financial security for their long-term care needs.