Hedging your bets: How to buy a combination long-term care & life insurance policy

If skyrocketing long-term care insurance costs have you fretting about how to pay for getting older, you may want to consider a special type of life insurance that addresses your needs as you age.

That life insurance product is a combination policy that offers a death benefit to your heirs when you die, plus long-term care (LTC) benefits to you if you need them.

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Combination LTC and life insurance policiesSuch dual-purpose policies are growing in popularity. Data from LIMRA, an insurance industry research group, show that in 2011 life combination products grew 56 percent, representing the third consecutive year of double-digit growth.

"Consumer interest in these hybrid products is extremely high and we anticipate this demand to continue for at least the next five years," says LIMRA spokesperson Catherine Theroux.

If you have a need for life insurance and are weighing your options for an LTC policy, here's what you should know about getting a "linked benefit" policy that combines both forms of coverage.

More than nursing home payments

For starters, although many people assume that LTC insurance pays only for a nursing home stay, in reality it can be far more comprehensive.

"Long-term care benefits can kick in anytime you need help because you can't live independently any longer," says Debra Newman, who chairs the board of directors for the nonprofit Life and Health Insurance Foundation for Education (LIFE).

LTC insurance also can be used to pay for a health care aide to help you at home with things like dressing, bathing or feeding yourself. Additionally, LTC insurance can cover the cost of staying in an assisted-living facility. Here's more about the basics of long-term care insurance.

Hybrid insurance policies that tie LTC benefits to life insurance give you these benefits too.

When you buy a combination life insurance/LTC policy, you typically have two options. You can add an LTC rider to your life insurance policy and then pay in annual premiums. It's more common, however, to pay in a lump sum of cash.

Depending on your age and health, some insurance companies will let you start with a sum as small as $50,000. But to get meaningful benefits, you should pay a lump sum of at least $75,000, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI).

Immediate access to your benefits

In exchange for that up-front payment, you get immediate access to a life insurance death benefit -- typically about two times the amount you paid. Your up-front payment also guarantees coverage for any future LTC expenses you may incur, usually by up to about six times your investment.

For example, Newman ran an insurance quote for a 55-year-old female nonsmoker who pays a $100,000 lump sum into a combination life insurance/LTC policy offered through Lincoln Financial Group. Assuming the woman never needs extended care, once she dies her beneficiaries would receive a $195,137 life insurance check from Lincoln. If she required extended care, the woman's hybrid policy with Lincoln would provide LTC benefits up to $585,411.

Any money used for LTC payments is typically deducted from the death benefit. But some insurers, such as Lincoln, also offer a 10 percent guaranteed minimum amount for a death benefit, even if long-term coverage is fully tapped.

In the case of the 55-year-old female nonsmoker, even if the woman collected the full amount of her LTC benefits, her heirs would be guaranteed to receive at least $19,514, or 10 percent of the face amount of the $195,137 death benefit.

Not for everyone

Despite the peace of mind they may offer, these policies aren't for everyone because they require a significant up-front deposit.

To fund a combination life insurance/LTC policy, often you can move the money tax-free from an existing whole life insurance policy that has cash value. Alternatively, you can reallocate cash from a low-yielding savings account or a certificate of deposit "that isn't collecting much interest," Slome recommends.

Most lump-sum combination policies offer a guaranteed return of premium. "That's a big selling point because it assures the client who's thinking, 'If I change my mind, and I later get cold feet, I can get my money back,'" Newman says.

"Insurers like them too, because at the time you [make a] claim, the first money that pays out is the $100,000 or whatever amount you put in," adds Newman. Insurers are "not at risk until that original money is gone. And that allows them to price it reasonably."

Not everyone will qualify, however. "There still is underwriting," Newman explains. "You still have to be healthy enough to make this decision. The insurance company is looking at not just for life insurance purposes, but for potential long-term care claims too."

The return of premium offered by most lump-sum combination policies applies to the upfront payment that the buyer makes to fund a life insurance policy with an accelerated death benefit. Money-back guarantees are offered for both single-premium policies -- in which people pay in one lump sum -- as well as flexible-premium policies that can be fully funded with annual payments over several years. This is a rider or endorsement that policyholders must purchase. In the case of Lincoln, they call theirs the "enhanced surrender value endorsement."

If you change your mind after purchasing a combination life/LTC policy from Lincoln, the sum of your premium payments can be returned to you, reduced by the amount of any loans, withdrawals or benefits paid.

These policies have surrender charges. So if you change your mind within the first several years, that could impact the amount of money you get back. When you shop for combination policies, it's wise to consult a trusted financial advisor with insurance expertise and let him or her compare different policy benefits, features and rates and then make a recommendation, based on your age, health, budget and other factors.

"Consumers have to understand that in this area of planning, this is not a go-it-alone product," Newman says. "You really need to have a strong insurance professional helping you."

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