Robert Schneider, CFP®, RICP®

Your Annuity Guide – Part Three: Hybrid Long-Term Care Products

This is the third part in the series, “Your Annuity Guide.” The series reviews the different types of annuities, and provides insights into when and how each type can be used. In Part One, we discussed Immediate and Longevity Income Annuities, and in Part Two, we reviewed deferred and equity indexed annuities.

The need for long-term care arises from an individual’s ability or inability to perform the six activities of daily living (ADLs) – eating, bathing, dressing, toileting, transferring (walking) and continence. Long-term care providers and insurers use ADLs to determine whether assistance is required and whether the individual is eligible to receive benefits. Traditional long-term care insurance benefits are usually triggered when a person is unable to perform two or more ADLs. Hybrid LTC products tend to use the same guidelines. But vendors and policies can vary so be sure to confirm this before committing to a particular solution.

Hybrid Long-term Care Products

What is it?

Traditional long-term care insurance has declined in popularity due to high cost and its use it or lose it nature. That is, if you die without ever having to use the LTC benefit, you never get anything out of it. Realizing this, insurance companies began creating hybrid products that are a combination of either life insurance and long-term care or annuity and long-term care. The life insurance products come with long-term care riders that, if chosen, allow access to the death benefit prior to death to pay for long-term care needs.

The annuity products allow access to principal and many have a multiplier that is triggered if long-term care benefits are needed. For example, if a hybrid annuity is funded with $100,000 and has a 3 times multiplier, the contract owner could receive $300,000 in benefits that can be used to pay for long-term care needs.

How is it taxed?

This is a little trickier than the other annuity products discussed (in Part One and Part Two), because the tax depends on how the policies are structured. Benefits received from a life policy with a chronic illness rider would likely be taxed. Benefits from a life policy with an LTC rider would likely not be taxed. Consult with a tax advisor to verify how the tax treatment of these products could affect you.

How can it be used most effectively?

Some retirees have significant cash value built up in life insurance policies in which the death benefit is no longer needed. Exchanging the cash value into a hybrid product to address the potential for a future long-term care need is a great way of getting long-term care insurance with no additional out of pocket expense.

Any reason for caution?

Due to the long-term care component HLTC products are subject to medical underwriting. This is different from a regular annuity that would normally not require medical underwriting. For some issuers the underwriting may be more stringent than for a regular life insurance policy, again, due to the LTC component. Also, typically a traditional LTC policy will provide a higher benefit than hybrid products. So if maximizing LTC coverage is the goal, the traditional product may be the way to go.

In the next post, we’ll conclude my series by outlining some annuity strategies. Look for it two weeks from today, Tuesday, November 22nd.


Cleary Gull Advisors does not provide tax advice. Investors should consult with their financial and/or tax adviser prior to purchasing an annuity.

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Views and comments expressed in this blog are those of the author and do not necessarily represent the positions of Cleary Gull or fellow Cleary Gull associates.