The high cost of Long Term Care is an expense that nearly 1 in 2 people will encounter sometime during their lifetime.  Given the high odds and family experiences of many baby boomers, there is tremendous interest in Long Term Care Insurance.  In the past several years, insurance companies have rushed out products called “hybrids” that mix long term care benefit payments with life insurance or annuity options.  The result is a guaranteed premium, often made upfront, and usually return of premium if the policy is unused.  The initial appeal of this approach is obvious.

This week, morning star digs in with an article covering the topic of hybrid policies.  Unlike most insurance companies, they cover both the pros and cons.  And cons, there are.  For an average couple in their 50s or 60s, they are giving up market-based growth for 20+ years, on average.  This concept of “opportunity cost” is not lost on more sophisticated investors, but may be a new concept for some buyers of these types of policies.

By plunking down a lump sum, the purchaser of the hybrid policy effectively cedes the right to earn a higher return on that money in a more favorable yield environment, turning it over to the insurer instead. That’s because the insurance company controls the cash value of the policy, and is under no obligation to increase cash value as prevailing yields trend up. Indeed, some of the policies don’t promise any growth of principal at all.

Here’s a chart showing the striking difference in cost, even if you end up paying premiums for 20 years on the traditional annual-pay premium:


To be fair, the single premium policy would return a $136,875 death benefit less any LTC services paid out.  If that seems attractive, look at the cost differential and consider buying a standalone life insurance policy separately.

The article goes on to point out that some owners of existing annuities may benefit by doing tax-advantaged 1035 exchanges into the hybrid products.  For many, though, keeping the money yourself and buying standard Long Term Care Insurance makes all the sense in the world.  After all, the saying “an ounce of prevention is worth a pound of cure” is apt here.  A sample premium calculated by LTC Tree in Texas in September 2014 for a 61-year-old male found that $273,750 policy cost was $1,288/year from an A+ rated insurer.