It's worth the effort to weigh your options on long-term care costs

Q: The only area where my wife and I are financially vulnerable is long-term care. A health insurance broker let me know about a new hybrid product that is part long-term care (LTC) insurance and part life insurance. A person plunks down a couple hundred thousand dollars, and in return, if you need LTC payments, they pay out up to something like $8,000 per month for as long as you need it. Whatever you don’t use for long-term care goes to your beneficiaries as a life insurance payout. What you think of this hybrid model?

Mike

A: The case for long-term care insurance is strong. Medicare covers little of these expenses and Medicaid, the public long-term care option, essentially requires impoverishment first.

Insurance is the classic financial-planning solution for handling an uncertain risk with a potentially large price tag. Premiums for long-term care insurance are steep, however, and the number of providers has shrunk dramatically in recent years. Enter the hybrid policies. The basic idea is to typically pay a onetime lump-sum premium, although the option of paying in installments is increasingly offered.

The attraction to hybrid policies is that your heirs are likely to get something from the policy. Standard cautions apply: Fees can be high, and the benefit isn’t protected against inflation. Hybrid plans are complex.

The key consideration when dealing with a hybrid plan or a long-term care policy is whether buying this insurance product is the best use of your money to cover the risk of long-term care expenses.

“Mike’s question suggests the outline of the response; at its core, this is a break-even analysis,” said Jonathan Guyton, certified financial planner with Cornerstone Wealth Advisors in Edina. “Since he has ‘a couple hundred thousand dollars’ that’s not needed, the question becomes whether this money is better used to self-insure by letting it grow untouched until needed.”

Specifically, can you create a healthy margin of financial safety by focusing on building up savings and keeping spending down without sacrificing quality of life? How might you invest the money if it isn’t used on an insurance policy? I’d carefully evaluate your own support system of family and friends. Can you realistically rely on them to help out if needed? I’d also investigate the convenience and cost of care services in your community.

Once you have gathered this information, revisit the hybrid plans or long-term care insurance plans and see if it’s the better option.

Chris Farrell is senior economics contributor for “Marketplace” and Minnesota Public Radio.