March 31, 2022
The Guide to Life Insurance With a Long-Term Care Rider
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 LTC benefits. 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.
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 (including continence), 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 have a terminal illness, chronic illness, or critical illness and will usually die within a certain period of time, such as two years. Each policy has its own specific exclusions that may apply, so it is important to look at your life insurance policy and/or consult with your financial professional.
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 health aide 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. In some cases, the insurance company pays the costs directly, while in other situations the insurance company will provide reimbursement your payments.
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 policy’s 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.
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.
Some long-term care policies have rigorous underwriting requirements including a complete medical exam with blood work completed by a licensed health care service. In addition, a copy of the insured’s medical records is 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.
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.
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, regardless of what your actual costs are (this approach is called the indemnity model).
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 or an annuity 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 $50,000, then you may want to consider selling your policy to a life settlement company. A life settlement 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, how these costs will impact your overall finances as well as those of your beneficiaries, and/or to get a long-term care insurance quote.
Want to see how much you could sell your life insurance for? Find out in seconds with our free life settlement calculator. You can also call Q Life Settlements at 866-679-9410, contact us here, make an appointment, or email us email@example.com to discuss your situation. Our team is available and ready to explain to you all that you would want to know about life settlements.
Remember: Never abandon a life insurance policy without looking at the life settlement option first!
Author: Steven Shapiro
Steven Shapiro is the founder of the Company and also the President and CEO of Q Capital Strategies, LLC and Life Settlement Solutions LLC. Steven has been active in the life settlement industry for the last 18 years. In addition to his life settlement experience, Steven has expertise in strategic consulting, investment banking advisory services, and private equity investing. Steven holds a B.A. degree in economics from the University of Pennsylvania and an M.B.A. in finance and entrepreneurial management from The Wharton School of the University of Pennsylvania. Steven is also the immediate past Chair of LISA (having previously served as Chair), the Life Insurance Settlement Association, the oldest and largest trade organization in the life settlement industry.