Considering Hybrid Long-Term Care Insurance? Policy Differences To Understand Before Buying

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Contributor, Benzinga
April 25, 2022

The majority of individuals purchasing long-term care protection today are opting for a hybrid or linked-benefit form of insurance. These tend to be life insurance policies that include a rider providing long-term care benefits if needed.

Few consumers are aware that two versions of hybrid policies exist. Each adheres to a specific Internal Revenue Code that spells out what the policy is and what it isn’t.  The differences may not become evident until the policyholder is in need of care.  That’s when they can be the difference between receiving anticipated benefits and not.

What Are The Two Different Plans?

When it comes to hybrid long-term care policies, there are two Internal Revenue Codes (IRC) that define policies. The first is IRC Section 7702B. This section applies to policies defined as long-term care insurance.  

The second is IRC Section 101(g).  This section defines coverage considered chronic illness coverage.  Indeed, the code specifically says that 101(g) policies may NOT be marketed in any manner as long-term care coverage. You won’t find the words ‘long-term care’ in any of the insurance company’s promotional material.  You will likely see references to nursing home care, assisted living, home care but not the words long-term care.

Why Should Prospective Buyers Understand The Difference?

According to the American Association for Long-Term Care Insurance, roughly 60 percent of new hybrid policies purchased in 2021 met IRC Section 101(g) regulations.  Financial advisors and insurance agents often find these plans preferable to sell because they do not require advisors undergo specific training and fulfill continuing education requirements.

There are pros and cons to each type of hybrid long-term care insurance plan.  Failing to ask which type of plan you are purchasing will have the greatest implication should you ultimately require qualifying care.  That likely will not occur for some time, typically 10 or more years down the road.  However, it is the reason you purchase this coverage in the first place.

Possible Benefit Differences And Why They Matter

All life insurance policy provisions are contractually governed and spelled out within the policy.  This is a formal contract between the insurance company and the policyholder.  As a rule, you will not get a copy until after you apply, are approved and generally pay the premium.  We’ll share a way to get a copy before you buy in a moment.

On the positive side, 101(g) chronic illness riders generally will pay benefits without consideration to actual care costs.  Their indemnity or cash formula can be beneficial as compared to reimbursement models used by many, but not all, 7702B long-term care insurance riders.

The significant down side to 101(g) plans lies in their definition as a chronic illness rider.  Simply explained, there can be situations where one needs care that we generally define as long-term care.  Unfortunately, these situations will not meet the chronic illness definitions and thus not qualify the policyholder to receive benefits.

Best Ways To Get The Best Hybrid Long-Term Care Coverage

Always ask which Internal Revenue Code the policy being recommended meets.  One way to truly see what you about to buy is asking for a specimen policy.  This document, often 50 pages or more, is a generic version of the policy itself.  The advisor or insurance agent can easily provide a PDF if you request one.

 Unlike other forms of insurance where switching from one policy to another can be beneficial, it almost never pays to switch among hybrid long-term care policies.  For that reason, comparing multiple plans before buying can save you money.  It can definitely help ensure you are obtaining the best hybrid long-term care coverage for your future needs.

The American Association for Long-Term Care Insurance can connect you with a specialist appointed with multiple traditional and hybrid insurance companies.  To learn more, call the organization at 818-597-3227 or visit their website.

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