The insurance industry is tying together life insurance with long-term care. The policies are expensive, but they cover events people are likely to experience.
Victor Ricciardi's parents bought a traditional long-term-care insurance policy in the 1990s, when they were approaching their 60s and his mother's employer offered an opportunity. She consulted with Ricciardi about it because he was an expert in finance - behavioral finance, to be exact. He was all for it.
It was the kind of policy where you pay premiums for years and it pays out for usually five or six years if you need care, but you get nothing back if you never use the policy or stop paying. Ricciardi had seen what the family had to do to take care of his grandfather after he had a stroke, and he knew that the purpose of such insurance was to protect against the catastrophic cost of care.
Ricciardi's parents didn't bring it up again until a few years ago, when both of them, by then in their 90s, fell ill and needed care. The policy covered more than $10,000 a month in expenses, and Ricciardi estimates they ended up getting about $200,000 in coverage in total.
That motivated Ricciardi. Despite working as a visiting finance professor at Ursinus College and co-authoring the new book "Advanced Introduction to Behavioral Finance," he had not yet undertaken much estate planning for himself. Now 55, he decided it was time to at least buy into a long-term-care policy before he got too old or ill to qualify for the medical underwriting.
But the long-term-care policies of the past are hard to come by these days, because the rich benefits bankrupted more than a few companies, and others stopped offering new policies. The few options left on the market are expensive and offer less coverage - fewer years of coverage, lower daily limits and less inflation protection. Today, just over 3% of the U.S. population has long-term-care insurance, according to Limra, a life-insurance industry research group.
But Ricciardi found a new option: a hybrid long-term-care and whole-life insurance policy. By merging the two, the insurance industry has found a way to keep providing long-term care insurance. These plans come in different shapes and sizes, but the idea is that they will help cover longer-term care for the same five or six years as traditional policies did - which is the average length of time of most care claims - but if you don't end up needing it, your heirs get the remainder as a death benefit. So either way, your premiums will not just evaporate. Given the long-term-care crisis the country is facing, the innovation around these hybrid plans is one of the Best New Ideas in Money.
"It's the sexy new way to plan," said Natalie Karp, an independent insurance agent based on Long Island, N.Y., who sells both traditional and hybrid policies. "Why do people like it? Because everything in it is guaranteed. This is the way consumers want to get the product. They want to have their cake and eat it, too."
That's definitely what Ricciardi liked about it. "The idea of the product is that you're getting three options in one: a death benefit, potential income and long-term-care coverage if you need it," Ricciardi said. He is, however, too much of an analyst to be a full-fledged advocate. "What I try to teach my students is to look at any financial service or product and see benefits and disadvantages. There's no perfect option," he said.
One major drawback to these policies is that they are complicated. Ricciardi said that when he started to explain his policy to his students, they got all worked up as soon as he started to talk about the underlying mutual-fund investments that drive the policy and wanted to talk about low-fee exchange-traded funds instead.
Complicated solutions are often the result of complicated situations. What the insurance industry is trying to do with hybrid policies is to solve a daunting math problem. As the baby boom generation ages, more than 10,000 people a day are hitting age 65. Research from the Commonwealth Fund, a nonprofit healthcare-research organization, shows that some 68% of people in the U.S. will eventually need some kind of care, with 42% using paid in-home care and 48% going to a facility. The average cost of all paid care starts at $50,000 a year and can be practically infinite - or at least it seems that way to the families trying to pay for it.
The only safety net for long-term-care in the U.S. is Medicaid, which requires recipients to spend down their assets and get in line for the nursing homes and home health aides in the program. Some 52% of all those needing nursing care are paying for it via Medicaid, according to the Commonwealth Fund, while 9% are using private insurance - mostly from traditional long-term-care policies that were issued long ago. About 16% are paying out of their own pockets.
New, affordable options are needed in order to protect people from the catastrophic cost of a care need that outruns their ability to pay for it.
"Some people have enough assets to fund an average amount of care, but they don't have enough to cover if it just keeps going," said Vince Bodnar, an actuary and senior adviser at consulting firm Alvarez & Marsal. "There are some [policies] that focus on that, but they are new, and most people aren't aware of them."
Hybrids of all stripes
Most of the top insurance companies in the U.S. - and many international companies - began marketing hybrid plans in the last few years to fill the void left as the traditional, stand-alone long-term-care market essentially collapsed under the weight of its own claims.
Consumers always objected to two major points with traditional long-term care: The premiums kept going up exponentially, and you could pay in for decades without getting any benefit. This was mostly because the industry never figured out a pricing structure that made the payouts possible to sustain. Long-term-care policies paid out more than $14 billion in claims in 2023 alone, according to data compiled by the American Association for Long-Term Care Insurance.
'The idea of the product is that you're getting three options in one: a death benefit, potential income and long-term-care coverage if you need it.'Victor Ricciardi, visiting finance professor at Ursinus College
Hybrid policies, on the other hand, solve for the rising premium costs by being attached to level-premium or limited-pay life-insurance policies or to lump-sum immediate annuities. And they also solve for the psychological return-on-investment issue by being paired with a death benefit. It's better if you never get sick enough to use this kind of insurance, of course, but not everyone is that sanguine about paying decades' worth of premiums. So at least having a payment for heirs at the end alleviates that feeling of paying all those years for naught.
Companies say they can afford these new hybrid policies because their actuaries and product developers have learned how to design better structures. "There's a lot of developments around cost-sharing to incentivize better behaviors to keep cost increases lower," said Jeff Beligotti, head of long-term-care solutions at New York Life, which offers a product called My Care that is based on health-insurance models.
Northwestern Mutual, one of the largest insurance companies in the U.S. by market share, according to the National Association of Insurance Commissioners, pairs its hybrid product, called Long-Term Advantage, with a whole-life insurance policy that has cash value and a guaranteed death benefit. You get six years of long-term-care coverage, but you can also buy in for up to four more years of coverage with policy dividends. The premiums can be paid in one lump sum or over 10 years or 15 years.
Other major life-insurance companies offer similar products, like Mass Mutual's CareChoice One or Lincoln Financial's MoneyGuard. Some offer these policies paired with a variable-life policy, which means the policyholder has more choice and control over the underlying investments than with a whole-life policy, but also more risk. Collectively, the industry refers to these policies as asset-based, because they fund long-term care with the value that builds up over time.
The premium costs to consumers are not transparent, because they are highly dependent on age, gender and health conditions. "Generally, these are built on a little bit of death benefit but are highly leveraged for long-term-care coverage," Karp said. "Say you put in $100,000 as a lump-sum premium on a hybrid policy. You'd get $140,000 as a death benefit and potentially $450,000 in long-term-care coverage. What you did is buy the minimal amount of death benefit and leveraged the long-term-care."
Another type of policy is called an accelerated policy, which advances the payment of the death benefit in order to cover long-term-care costs. If you end up needing the care, your death benefit is reduced along the way. Costs are similarly opaque. These are more typically offered as a voluntary workplace solution, with no medical assessment needed at the basic tiers - similar to what Ricciardi's mother was offered years ago, but now a hybrid that combines long-term-care insurance with life insurance, either whole, variable or term. "They are selling a lot of those," Bodnar said. "Right now all the buzz is around selling long-term-care like this in the worksite again."
These policies, offered by companies like Chubb, John Hancock and Trustmark, might help solve one constant problem that has plagued traditional long-term care, which is that people typically don't think about buying it until they are in their 50s or 60s. That's part of what makes it so expensive, because people are closer to needing care. Workplace plans are a way to reach people a little earlier, in their 40s or even 30s. Generally, the healthier the people who sign up for insurance are, the lower the cost for everyone.
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