Risk is standard with investing, whether market, liquidity or inflation risk, to name a few. One threat you may not anticipate, however, is the possibility of long-term care expenses siphoning away your wealth.
[See: The Best ETFs Retirees Can Buy.]
The cost is staggering. Genworth Financial puts the median annual cost of long-term care in a private room at $92,378 in 2016. And you can’t look to Medicare to cover the cost. With the average nursing home stay lasting roughly 2.5 years, long-term care could take a sizable bite of your retirement savings.
Long-term care insurance is designed to help pay for long-term care so you don’t spend down your retirement assets unnecessarily. But there’s a downside.
“With traditional long-term care insurance, you pay an annual premium, and should you need long-term care, the policy pays out a daily or monthly benefit,” says Gregory Hammer of Hammer Financial Group in Schererville, Indiana.
What if that coverage is never needed? Hammer says traditional long-term care policies are “use it or lose it.” They can give you peace of mind knowing that long-term care needs will be paid for, but you run the risk of spending thousands of dollars on a policy for benefits that may never be used.
It doesn’t have to be all or nothing, however. Hybrid policies offer an alternative for safeguarding retirement wealth. These policies combine life insurance with long-term care coverage.
“The key benefit with a hybrid policy is that you don’t lose your money if you don’t use your long-term coverage,” says Keith Singer, a certified financial planner and owner of Singer Wealth Management in Boca Raton, Florida.
Instead, you can cash out the policy’s value to recover some of what you’ve paid in premiums or leave your heirs with a death benefit when you pass away. The death benefit is key, Singer says, “because a lot of people get sick, but everyone dies.”
That can make hybrid policies more attractive than standalone long-term care insurance. To determine whether hybrid policies should be part of your retirement strategy, consider their merits and potential drawbacks.
[See: 8 Things Not to Hide From Your Investment Professional.]
Convenience and predictability. A hybrid policy can help you fill multiple financial buckets in a simplified way. Samuel Price, an independent broker with Assurance Financial Solutions in Birmingham, Alabama, says these policies may appeal most to investors who want flexibility.
“You could conceivably accumulate cash to supplement retirement savings, meet long-term care spending needs and generate a 100 percent tax-free life insurance benefit all in one policy,” Price says.
He says what often happens with long-term care insurance is there’s a tendency to focus more on the lost premiums than the security that having the coverage provides. Hybrid policies are built to solve this problem.
The way these policies are structured can offer some stability and certainty as you plan for retirement. For example, calculating your target withdrawal rate can be challenging if health care is a big question mark. If you have a hybrid policy in place to cover those expenses, it may be easier to pinpoint how much of your assets you can reasonably draw down each year.
There’s a trade-off regarding liquidity, and if you want to cash out or cancel your policy, you may pay a penalty. Hammer says you could wind up taking out less than you put in.
Cost versus value. Cost is important when considering a hybrid long-term care policy. Rob Chewning, national director of life insurance for Wells Fargo Private Bank in Charlotte, North Carolina, says one advantage these policies offer over traditional long-term care insurance is locked-in premiums.
“Long-term care policies are difficult to price, which can result in premiums increasing in later years at a time when clients are retired,” Chewning says. With hybrid policies, you don’t have to worry about your coverage becoming unaffordable later in life.
Measuring the anticipated cash value of your investment is one way to put the cost in perspective. For example, Price says a 50-year-old man who is paying $2,400 annually into a hybrid policy and begins drawing long-term care benefits at age 75 would have paid $60,000 in premiums and accumulated $130,000 in cash value, assuming a 7 percent rate of return.
Brian Ashe, executive vice president of Life Happens, a nonprofit organization that educates consumers about insurance, says another way to look at this product is in the context of the value of the policy’s death benefit. This ultimately hinges on the year the insured dies.
He uses an example of a 63-year-old man purchasing a hybrid policy with a $300,000 death benefit and a $6,000 long-term care benefit payable up to 50 months. If the man dies at age 83, the death benefit would have a taxable equivalent internal rate of return of 13.52 percent. If he dies at age 87, the rate of return would be 9.15 percent.
If he dies at age 100, the rate of return would drop to 2.52 percent but, Ashe says, that’s still better than what a certificate of deposit or 10-year U.S. Treasury note would pay at current interest rates. In terms of cost, he says, hybrid policies are better suited to investors who need a death benefit and a long-term care benefit but may have difficulty affording premiums for both under separate policies.
Hammer reminds investors to be realistic about returns. “If it’s performance you’re looking for, insurance products are never going to look as good as traditional investments in equities,” he says. The value these policies offer is protecting your retirement wealth and leaving a legacy for your loved ones.
Comparison shop. Hybrid policies can vary greatly from one insurer to the next. What works for one investor may not be right for another, and research is vital.
As you begin your search for coverage, Singer recommends reviewing the track record of the insurance company. You should also look closely at the contract to determine how you’ll earn interest and how much capital you’ll need to buy a policy. Other considerations include how the policy pays claims related to long-term care, how the long-term care benefits are calculated and when you can access those benefits.
[Read: When Is it OK to Draw Cash From a Life Insurance Policy?]
Age is also important, as it influences both the cost of getting insured and the value you’re able to wring out of the policy. When in doubt, think about buying sooner rather than later.
“The younger you get a hybrid policy, the more leverage you have,” Singer says.
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Safeguard Wealth With Hybrid Life Insurance originally appeared on usnews.com
