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Last Updated January 22, 2018

Should you buy Hybrid or Traditional Long Term Care Insurance?

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The Go-Go 1990’s

The year was 1999 and like the dot-com era of companies such as Pets.com, things were sky high for the Long Term Care Insurance Industry and the financial industry in general.  Banks and Insurance companies were flush with cash and interest rates were at a normal 5%-6% range for things like CD’s and the 10-year US Treasury.  The fixed interest rate market was critical for for these Long Term Care Insurance companies offering the at the time rich benefits for the premium dollar.

Insurance companies are required by the State Insurance Commissioner’s office to put a large portion of the premiums they take in from policy holders in fixed interest rate investments.  Back in 1999, when those rates were 5-6% things were great for the Long Term Care Insurance industry and the customers received unmatched benefits and stable premiums.

The Liberal and Obama Caused Financial Crisis

Fast forward to 2008 when the financial crisis hit, crippling the fixed rate markets.  For years liberal policy makers forced banks to lower their lending standards so that people with sub-prime credit could buy homes.  In 1999, the Clinton administration repealed the 1934 Glass-Stegal act, which had kept banks and investment firms separate.  Then, Bill Clinton signed repeal of an important FDR 1930’s law laid the ground work for looming 2008 disaster.  The Big Banks were no angels either… factor in some aggressive investment firms running with their new found liberal freedom and the 2008 crisis was ripe for implosion.

Can’t make it, fake it.

The next eight years, the Obama administration pushed the Federal Reserve to lower the aforementioned fixed rate market to near zero percent rates and drop in a policy called quantitative easing to infinity known as QE.  QE essentially pumps fake money into the economy giving it a sugar high which was designed to hide the failed Obama era policies such as the 1-Trillion failed “shovel ready jobs” stimulus. The 2011 Dodd-Frank bill just led to more financial monopolies in the financial world as the big banks could hire the lawyers needed to navigate the new maze of rules and the smaller banks went under. This just gave the consumer fewer choices and less money in their pockets.

This low interest rate environment was great if you wanted to buy a new Range Rover at 1.25% interest rate, but bad for savers who owned investments like CD’s… and it was bad for insurance companies and their policy holders.  This fake economy during the Obama era was driving force for the Long Term Care policies sold years before to begin to crack.

Think about it… the actuary crunching what the numbers would be in the next 30 years back in say 1995, had no clue we’d have a ten year period of ultra low interest rates and  could have possibly foreseen we’d of had a time where the Fed did not raise interest rates from 2007-2016!!  Those Long Term Care policies sold in the 1980- around 2008 most all grew benefits 5% compound as that had been the interest rate market for decades. When the 2008 crash hit, this crushed the Long Term Care Insurance market and caused the insurance companies to cut benefits and increase prices on both old and new customers.

Again, up until 2008 the norm for the inflation protection benefit on Long Term Care Insurance had been 5% compound, they changed it to 3% compound.  With this change the difference for the consumer 30 years down the road with 3% compound vs. 5% Compound is the consumer will have about 100% less benefits just by going from 5 to 3% rate.  They also implemented gender based rates.  Up until 2008, a man and women with the same age and health class would pay the same rate. Now, the female will pay about 50% higher rates than men.  Women, now before you get too alarmed remember that men have been paying much higher life insurance rates for years.  The point being is when the tide of a normal interest rate market went out, the consumer and the insurance companies were left standing their naked and having to deal with this big-government and big-company caused crisis.

It is what it is.

Now that we know the cause of the upheaval of the Long Term Care Insurance market, let’s talk about what options you are left with.  Traditional pay-as-you-go Long Term Care Insurance is still the best bet in most situations  in our opinion. The Long Term Care Insurance companies are now selling a much more stable product that has in reality probably over corrected for past actuarial mistakes which will most likely cause the modern day policy sold to experience more stable rates than the pre-2008 LTCI policies sold.

Enter the Hybrid-Long Term Care Insurance policy.

The rise of hybrid long term care insurance since 2008 has largely been due to the rate increases of the past traditional Long Term Care Insurance policies.  Hybrid Long Term Care Insurance plans require an upfront premium of say $100,000 and if you need care you will have the same type of LTCI benefits of a traditional plan.  However, if you don’t need care that $100,000 premium you put in and usually a little extra will be given to your family at death tax free.  The life/long term care hybrid plans also offer a guaranteed premium.  The insurance company can never ask you for more money if they miscalculate the risk.

So what should you do.

To answer this question you need to take a look at what you are currently doing with your investment and what your risk tolerance is. If you have the bulk of your money invested in low interest rate paying investments such as CD’s you may want to consider parking a portion of that money in a Hybrid Long Term Care Insurance plan. If you keep it invested in that CD you or your family will eventually have to pay capital gains tax on the interest you made on that money all of those years. With the Hybrid Long Term Care Insurance plan, if you never need long term care your family will receive the death benefit which will be higher than what you put in with almost all companies tax-free.

The flip side of the argument is if you are a savvy investor you may be able to earn a much higher rate of return on that chunk of money it would take to fund a Hybrid Long Term Care Insurance plan.  Food for thought…

What product does LTC Tree prefer?

Neither. We are like an umpire. We call the balls and strikes as pitched and will go over the good, the bad and the ugly with all of these products. We work with all the major blue-chip companies and can show them all to you. We are truly independent and can counsel you on your unique situation and help match it with the best product. If you’d like to learn more simply fill in the form below.

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