How does Linked Benefit Long-Term Care Insurance work?

Unlike Traditional Long-Term Care Insurance (LTCI), a Linked Benefit Long-Term Care Insurance policy is a different insurance product, such as life insurance or an annuity, with a Long-Term Care Insurance rider attached. This “Hybrid LTCI” approach has become popular. Essentially, if you do not need long-term care, your heirs can still receive a benefit. Additionally, even if you require some care, any remaining funds could also be passed on to your heirs.

Linked Benefit Long-Term Care Insurance policies and annuities pay for qualifying long-term care expenses.

For a linked benefit life insurance policy, long-term care expenses are usually covered with an accelerated death benefit.
For a linked benefit annuity, long-term care expenses are paid by a higher credited rate of interest or a long-term care benefit multiplier.

Qualified long-term care expenses include the inability to do activities of daily living or care needed due to severe cognitive impairment. If you meet the requirements, you may be eligible to receive a portion of the policy death benefit or annuity cash value tax-free for your long-term care needs.

Paying for a Linked Benefit Plan

You can pay for a Linked Benefit policy:

With an annual payment every year, or for a limited period of time (or monthly, quarterly, or semi-annual payment) for life.
By making limited payments such as for five years, ten years, or to age 65.
With a single payment from a bank account or Certificate of Deposit.
From a cash value trade or exchange from an existing permanent life insurance policy via a 1035 exchange.
By a combination of different payment methods.

Is Hybrid Long-Term Care Insurance Right for You? (Forbes)

Benefits

Safety – Your cash value is free from market risks.
Liquidity – Depending on the policy, cash values may be accessed easily and quickly with no or low withdrawal penalties.
Tax-Advantaged Growth – Cash value grows on a tax-deferred basis, which can allow your cash value to grow faster than funds that are taxed annually.
Death Benefit – The death benefit is usually paid tax-free directly to your named beneficiaries, bypassing probate.
Long-term Care Benefits – These benefits can cover home health care, nursing home care, and adult daycare. Benefits increase as your annuity value increases.
Premium Guarantee – Unlike Traditional Long-Term Care Insurance, where the premium is Guaranteed Renewable and could increase, the price of most Linked Benefit Long-Term Care policies is set, is not Guaranteed Renewable, and does not increase.

Advantages of Linked-Benefit or Hybrid Long-Term Care Insurance

Dual Purpose Double Duty Protection: If you don’t need long-term care, you still get the death benefit or annuity payout, so it’s not “use-it-or-lose-it.”
Fixed Premiums: Many hybrid policies are designed with a single, lump-sum premium payment or a guaranteed level premium, protecting you from future rate increases.
Simpler Underwriting: Since these policies combine life insurance/annuities with long-term care coverage, the underwriting process can sometimes be simpler compared to standalone long-term care policies.
Tax Advantages: The long-term care benefits are often tax-free, which can provide a financial advantage.
Guaranteed Value: Unlike a traditional policy, a hybrid policy is not “use-it-or-lose-it.” If you never need long-term care, your heirs will receive a death benefit (from a life insurance policy) or a cash value (from an annuity).

Disadvantages of Linked-Benefit or Hybrid Long-Term Care Insurance

Higher Initial Costs: The initial premium for a hybrid policy is typically significantly higher than the annual premium for a traditional policy.
Less (Limited) Coverage: The amount of long-term care coverage provided by a hybrid policy may be less than what you could get for the same cost with a traditional policy. The benefit is limited by the policy’s death benefit or cash value.
Complexity: The terms and conditions for using the rider can be complex, and there may be restrictions on when you can access long-term care benefits.
Not Ideal for Everyone: Hybrid policies may not be the best choice if you don’t need life insurance or an annuity, as you’re essentially paying for more than just long-term care coverage.
Reduces Death Benefit: Using the long-term care benefits will reduce the amount of the death benefit your beneficiaries will receive.
Inflation Concerns: Some hybrid policies may not offer the same level of inflation protection as traditional policies, which could leave you with insufficient funds for future care costs.
Less tax advantage: Premiums may not be deductible.

Taxation

Long-Term Care Insurance riders are intended to be Qualified Long-Term Care Insurance Contracts under Sections 26 U.S.C. § 7702(b) of the Internal Revenue Code with benefits paid out tax-free.

You might want to compare insurance companies

There are a few rating services that analyze the financial strength of insurance companies. The financial strength of an insurance company is a very important factor to consider when purchasing long term care insurance. Claim payments are backed by the financial strength and claims-paying ability of the insurance company or companies you chose. Hence, it may be in your best interest to choose a highly rated insurance company or, better yet, more than one company. You can check ratings from sources like AM Best, Fitch, Moody’s, and Standard and Poor’s.

The Bottom Line:

Linked Benefit Long-Term Care Insurance may provide payments for care due to a chronic illness or injury. As a result, anything not used for your care can be passed on to your heirs in a death benefit. You can pay for it with a single payment or multiple payments, with the premium set at issue, which does not have an option to increase.

Speak with a Specialist

Let’s begin the conversation. If you’re curious about whether long-term care insurance is right for you, now is the time to get the facts before you make any long-term decisions. The earlier you plan, the more options you’ll have.