The Guide to Life Insurance With a Long-Term Care Rider

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The costs related to long-term care insurance are continuing to skyrocket with no end in sight. The insurance industry has responded with accelerated death benefit riders that can help to cover these costs at a more reasonable price. These riders represent the future of the insurance industry in many ways.

What is a long-term care rider?

A long-term care rider is one of several different types of accelerated death benefit riders that can be added to a permanent life insurance policy. This rider will allow the insured on the policy to access some or all of the policy’s face value (death benefit) if he or she needs money to pay for long-term care costs. This type of rider pays for expenses that cannot be covered by traditional health insurance or Medicare, and it is generally a far superior alternative to trying to qualify for Medicaid.

Triggers

The specific triggers that can make this rider yield a payout differ somewhat from policy to policy and life insurance carrier to carrier.

Some LTC policies will pay out if the insured needs any form of managed care. Others can only be triggered when the insured becomes unable to perform at least two out of the six activities of daily living (ADLs). These activities include eating, bathing, personal hygiene, transferring (as from a wheelchair to a bed), walking and grooming.

Still, other policies will only pay out if the insured can prove that they are terminally ill or have a chronic illness and will usually die within a certain period of time, such as two years.

What the long-term care rider covers

Most long-term care riders will pay out if any form of long-term care is needed. Qualified long-term care expenses include any form of home health care (where a trained person is required to come to the insured’s home and perform specific services that the insured cannot perform him or herself) and nursing home care.

In many cases, there will be a period of time where managed home care is sufficient, then transitions to nursing home care. The insured will usually stay there until he or she dies. The cost of using an assisted living facility is also frequently covered in many policies and riders.

The long-term care dilemma

Long-term care riders are very valuable because the U.S. government has published statistics showing that almost three-quarters of U.S. citizens who are 65 years old will need some form of long-term care before they die. And one of the chief advantages of this type of insurance product is that it is impossible for the insured to lose with a long-term care rider as opposed to a traditional separate standalone long-term care insurance policy.

With a traditional long-term care policy, the insured may pay thousands and thousands of dollars in premiums during their later years and then end up not needing any form of managed care. If this happens, the insured cannot recover any of the premiums paid into the policy. It is simply lost to the insurance company with no form of refund available.

A solution to the traditional long-term care dilemma

With a cash-value life insurance policy that has a long-term care rider, the insured is guaranteed to get something back if no form of long-term care is needed. If this is the case, then the insured can still access the cash value in the policy to use for any type of expense, and the death benefit will still pay out when the insured dies.

One way or another, the policy will pay out regardless of what happens. In fact, some hybrid policies will still pay out a small percentage (such as 10%) of the death benefit even if the long-term care rider uses up the entire original death benefit.

Cost

Some LTC riders are built directly into the life insurance policy and are included in the policy’s base cost, while other riders are optional add-ons that can be added for an additional cost. But this cost is usually considerably less than the cost of the premiums for a traditional long-term care policy.

The cost of many traditional long-term care insurance policy premiums, such as those charged by Genworth, has doubled in recent years because the costs of long-term care services have risen much faster than the insurance industry predicted. And it is rising the fastest in heavily populated areas such as New York.

This has effectively forced many policy owners to either let their policies lapse or forego paying for other expenses in order to keep their long-term care coverage in force. But the cost of a long-term care rider will never change once a single premium hybrid policy has been issued. This means that this type of rider is essentially immune from the rising cost of premiums. Many flexible premium hybrid policies offer this guarantee as well.

The American Association of Long-Term Care has estimated that the average cost for a single premium hybrid policy with a long-term care rider is $75,000. Prospective policyholders who have substantial liquid assets lying around earning a low rate of interest are good candidates for this type of policy.

Many insurers who offer single-premium policies allow insureds to cancel their policy and get a full refund of their premium after a certain period of time, such as five years. In order to get this, the insured cannot have used any of the benefits in the policy for any reason.

Underwriting

Some long-term care policies have rigorous underwriting requirements including a complete medical exam with blood work. A copy of the insured’s medical records is also usually required.

Healthy insureds will pay a lower premium than those with multiple health conditions. The underwriting process for the long-term care rider may be combined with the underwriting process for the life insurance element of the policy in order to simplify the overall process.

Other policies use simplified underwriting that only requires prospective insureds to answer a series of health-related questions over the phone or online. In most cases, the life insurance company will require a statement signed by a doctor certifying that the insured meets the requirements for benefits to be paid out before payments can begin.

Payment

There are a couple of different ways that a prospective insured can pay for a hybrid life insurance policy with long-term care protection. Some policies require that the insured pays for the policy with a single lump sum cash payment, while others are structured so that the insured will make a series of annual payments (usually lasting for less than 10 years) until the policy is paid up. The amount of long-term care coverage afforded by the rider may substantially exceed the amount of the policy’s face value (death benefit).

What types of policies can have this rider?

In general, the only type of life insurance policy that can offer an accelerated death benefit rider is a permanent policy. Whole life insurance, universal life insurance, and variable universal life insurance policies can all include this rider, either as a built-in benefit or at an additional cost.

Term life insurance policies generally do not offer this type of rider, although they can offer an accelerated death benefit if you become terminally ill and meet certain other conditions. You can also usually add a waiver of premium rider that will keep the term life policy in force in case you become disabled.

What is long-term care insurance?

Traditional standalone long-term care insurance policies are policies that are designed to cover some or all of the costs associated with long-term care. As mentioned previously, this can include any form of managed care such as home health care, where a trained person comes to the insured’s home and performs certain duties for the insured on a daily or regular basis. Or it can cover any and all expenses related to nursing home care. Long-term care insurance policies are usually offered by either life or health insurance carriers.

Most long-term care insurance policies have a waiting period, such as 90 days that must be satisfied before they will start paying benefits. This waiting period effectively functions as the deductible amount for the policy. The longer the waiting period, the lower the policy premiums will be.

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Some policies will pay all expenses related to long-term care up to an absolute dollar amount in a lump sum cash payment, while others will make monthly benefit payments for up to a certain dollar amount for each day of care.

For example, a policy might pay $150 per day towards the cost of nursing home care. The insured or the policy owner is left to cover any remaining balance that is charged.

These policies also have a maximum time limit for their benefit payments, such as two or three years. If the insured still requires some form of long-term care after the policy’s time limit has expired, then the subsequent cost of this care is handled solely by the insured (or a loved one such as a family member).

What is the financial impact of paying for long-term care benefits?

If you end up needing to use the long-term care rider on your life insurance policy, then the benefits that are paid out will lower your life insurance death benefit proportionately. It may be a dollar-for-dollar reduction in some cases. Be sure that your beneficiaries know that they will be getting less than they expected, or nothing at all, if you need to use the rider to pay for long-term care.

However, the benefits that are paid by the long-term care rider may prevent a family member from having to make the change from working full-time to working part-time in order to care for the insured. These benefits can ultimately improve the quality of life for both the insured and any potential caregivers. Having a trained person instead of a family member can help the insured with daily tasks such as toileting while enabling them to maintain their dignity during this period of their life.

There may also be income tax implications if you use your rider to pay for long-term care needs. Consult your tax advisor for further information on this possibility and be prepared to come up with a certain amount of money if a portion of your benefits are counted as taxable income. But lump sum payouts usually have no tax consequences of any kind. The benefits paid from a tax-qualified long-term care policy are also tax-free in most cases.

Do I have enough long-term care coverage?

The answer to this question depends to some extent on the condition of your health and your family’s history of longevity. If your forebears often lived well into their nineties, then your chances of doing the same are relatively high, assuming that you eat right, don’t smoke, and take good care of yourself.

But you may well reach a point where you simply become too feeble to care for yourself and function normally on your own. When this time comes, some form of long-term care will be needed, and you may need this care for a longer period of time than you expect. And it is possible that you may need care for several years if you develop Alzheimer’s or another form of severe cognitive impairment.

Statistics show that the average stay in a nursing home lasts for two or maybe three years, so you should have at least enough coverage to pay for that length of time. But you may also require home health care for a period of time before you are consigned to a nursing home, so be sure to factor that into your estimate as well. A private room in a nursing care facility costs an average of $7,700 per month, so a three-year stay would cost a little over $275,000 in today’s dollars. And that does not include the cost for any previous home health care that was provided.

If you own a standalone long-term care policy, find out from your insurance company what the benefit limits are and how much the policy will pay under a given set of circumstances. If your policy doesn’t provide enough protection to pay for the expenses described above, then you may want to look at purchasing a life insurance policy with a long-term care rider to make up for the shortfall.

Get a free life insurance policy valuation

If you own a straight life insurance policy with a death benefit of at least $100,000, then you may want to consider selling your policy to a life settlement company. This type of transaction will net you at least two to three times the amount of cash value in the policy, and you can then use the proceeds to pay for long-term care expenses. Consult with your financial advisor or health insurance agent for more information on paying for long-term care expenses and how this cost will impact your overall finances as well as those of your beneficiaries.

Want to see how much you could sell your life insurance for? Find out in seconds with our free life settlement calculator.

Author:
Chris Granwehr is the Founder of Dawn Life Settlements and a former senior manager with Mason Finance, an industry-leading life settlement provider in California. He's a member of the Life Insurance Settlement Association, and he has a passion for empowering customers financially through a faster, easier life settlement system.