February 27, 2019
Using Life Insurance to Pay for Long-Term Care Costs
When you plan for retirement, one of your primary concerns is making sure you have enough money saved up to live the lifestyle you want. What you may not account for, however, is the likelihood of needing long-term care later in life. In reality, many seniors will need some kind of long-term care at some point in their lives. In general, long-term care is needed when a senior is unable to perform activities of daily living on their own.
But as seniors live longer, they are more likely to need long term care services and need those services longer. The bad news is that the cost of long term care is steadily increasing year-over-year. Genworth’s “Cost of Care Survey” found that in 2020 a nursing home cost $8,820 per month, or $105,850 per year, an increase of over 62% from 2004. In fact, according to the U.S. Department of Health and Human Services, 70% of people 65 and older will need some form of long term care in their lifetime.
What is Long-Term Care?
According to the National Institute on Aging, long-term care (LTC) involves a variety of services designed to meet a person’s health or personal care needs during a short or long period of time. These services help people live as independently and safely as possible when they can no longer perform everyday activities on their own.
Many seniors will need short- or long-term care at some point in their lives. Seniors have many different options available for senior living and/or long-term care. There are also many different ways to qualify and pay for these care options. While these choices and options can seem overwhelming, seniors will be able to analyze their situation and take their preferences into account to find the best care alternative.
The Stages of Long-Term Care
Below, we review the five stages of long-term care to help guide the type of care and long-term care benefits available.
Stage 1 – Homecare
Homecare would typically start with someone coming into a senior’s home to assist with challenging tasks, such as house cleaning or cooking but not involve medical care. As needs change, homecare can further progress to unskilled and, ultimately, skilled nursing care services.
Stage 2 – Assisted Living
In an assisted living situation, the senior moves into a private room in a new community, typically an apartment in a larger complex. Meals are eaten in a social setting – a dining room – and there are planned events and opportunities for social interaction. The senior’s room typically has a call button for assistance. Many people in assisted living are quite mobile and some may leave the facility for shopping or visiting outside friends or family members.
In assisted living facilities, visits from family and friends are welcome. The level of assistance is adjusted to the needs of the residents. Assisted living facilities are not skilled nursing facilities, but assistance with medicine may be offered.
Stage 3 – Memory Care
For those with cognitive declines such as dementia or Alzheimer’s, memory care is often offered in a separate wing of an assisted living facility. The separation is needed to protect the residents with memory care needs with special security and safety measures, and the staff has special training to assist these residents. Special programs and activities are available to help the residents retain their skills as long as possible – to reduce the stressful feelings that are common for seniors with memory issues.
Stage 4 – Skilled Care
When a senior experiences a loss of mobility, advanced cognitive decline, or daily medical treatments or therapy, skilled care is likely going to be required. Skilled care involves medical care that is overseen by nursing or doctor supervision. Skilled nursing can be provided in the home or an outside, live-in facility. The most typical skilled care situation is a nursing home. Medicare will likely cover skilled nursing costs but approval is needed prior to moving into a facility. Here is a link to information describing Medicare’s role in skilled nursing care funding.
Stage 5 – Hospice/Palliative Care
When the situation arises that a person has completed or is near completion of all desired treatment, hospice or palliative care is provided to give comfort while the person is approaching end-of-life. Palliative care is provided when final treatment is administered to relieve pain. Hospice care often includes counseling to the person and the family. Medicare will likely cover the costs of hospice and/or palliative care. Here is a link to information from Medicare regarding such situations.
Costs of Long-Term Care
Long-term care expenses for these levels of care varies. Most people in Stages 1, 2, and 3 are privately paying for this care. Only at Stage 4, when nursing care is required, will Medicare step in to pay some of the costs and for a limited time. Stage 5 is primarily paid for by Medicare. And, as you can probably imagine, long-term care has a high cost.
How Can I Pay For Long-Term Care?
As a general matter, Medicare does not pay for long-term care, unless such care is needed as a result of a specific accident or injury. Even in these cases where Medicare does cover long-term care needs, such coverage will only last for a very limited period of time (typically, less than 30 days). As a result, long-term care is either paid for privately, through Medicaid, or with insurance.
For Medicaid to pay for your long-term care, you need to qualify for Medicaid by either meeting the requirements (minimal assets/savings) or complete a qualified Medicaid spend down. The other alternative, long-term care insurance is more fully described below.
Long-Term Care Insurance
For added protection and peace of mind, many seniors decide to purchase a type of insurance known as long-term care coverage. By having a better understanding of what this coverage is and the potential pros and cons of long-term care insurance, you can make a confident decision regarding your own insurance and senior finance needs. To be effective, these insurance policies need to be purchased well in advance of the time that the long-term care is needed.
Many different insurance companies offer long-term care insurance, but there can be significant differences in the products available from each company. In addition, there are insurance plans available that are hybrid life insurance/long-term care policies.
Long-term care is not health insurance, and health insurance will not cover these care costs nor will Medicare. It is important to anticipate these costs, otherwise the burden may fall on your loved ones to become your caregiver or cover the long-term care costs.
So, what is long-term care insurance, anyway? Specifically, a long-term care insurance policy helps to pay for many of the costs associated with needing long-term care due to an injury, chronic illness, or other medical condition that develops later in life. A life insurance company issues a long-term care insurance policy. Some common examples of long-term care services that may be covered include:
- skilled nursing home care
- physical therapy
- occupational therapy
- speech therapy
- adult day care
If you belong to AARP, AARP offers a long-term care program. Suze Orman, a well-known financial adviser, has authored an article published on the AARP site. The American Association for Long-Term Care Insurance was established in 1998 to educate individuals and to support insurance and financial professionals who market this protection. AALTCI’s website has a consumer information center that has the most current information including long term care insurance costs, ways to save, tax deductibility rules and long term insurance companies and their ratings.
If you are interested in purchasing long-term care insurance, you can consult with your financial advisor who can check your eligibility and help you select a policy that meets your needs.
A Life Settlement as a Payment Alternative
If you are looking to fund a long-term care policy, or if you have a life insurance policy that you do not need, do not want to keep paying for, or if you are looking to increase your bank balance, did you know that your life insurance policy could be a resource of additional security? You may be able to sell your life insurance policy in a life settlement to support your financial situation.
A life settlement transaction is a powerful tool that allows life insurance policyholders to tap the market value of their life insurance policy, which they can use however they need. In a life settlement, the life insurance policyholder receives a cash offer of an amount less than the death benefit, but more than the cash value from a life settlement provider. The new owner then pays all future premium payments on the policy. Life settlements are a regulated transaction, so make sure you are working with a life settlement provider or broker who is licensed in your state.
Unfortunately, most seniors in need of long term care don’t know that they may be able to tap the hidden value of their life insurance policy to cover these costs. When 80% of life insurance policies are lapsed or surrendered for little to no value, it is clear that an increased awareness of life settlements is paramount to help allay these steadily growing costs of long-term care.
Important Things to Know About a Life Settlement
When you sell your life insurance policy in a life settlement or viatical settlement transaction (this article explains the difference between a life settlement and a viatical settlement), you should keep in mind the following:
- The lump sum cash payment you receive from selling your policy will be more than the policy’s cash surrender value but less than the policy’s death benefit.
- Your beneficiaries will no longer receive a payout from your life insurance death benefit.
- You will no longer be responsible for paying insurance premiums on the life insurance policy.
- The benefit amount you receive from selling the policy can be used any way you choose – whether that is to pay from long-term care expenses or purchase an LTC insurance policy.
A life settlement may be able to help an individual in need of LTC services and who has a life insurance policy and your proceeds may be tax-free.
What Types of Policy Qualify?
Any type of life insurance policy is eligible for a life settlement – term life insurance, permanent life insurance policies (whole life insurance, universal life, variable life, indexed life), and group life insurance policies. All a life settlement company needs to start the process to review your life insurance policy is your medical records (which they will collect on your behalf) and policy information. Your life insurance policy is valued based on this information, and you can get a free, no obligation estimate using our life settlement calculator.
A Bill Introduced in Congress
A bill has been introduced in Congress (H.R. 7203 (IH) – Long-Term Care Account Act) which would allow seniors to use life insurance policies to pay for long-term care or cover a whole variety of other health care costs. The bill is intended to allow seniors to improve quality of life in their later years. It would also benefit taxpayers, since it would bypass the use of Medicaid for long-term care, which is a result that has the potential to save somewhere in the neighborhood of $2 billion over the next decade.
Origins of the Bill
The idea of using life insurance to pay for long-term health care needs for seniors is not exactly new. In 2017, the product was endorsed by the National Association of Insurance Commissioners (NAIC), and this brought additional attention and credibility to the concept. The product has since evolved into Q Capital’s Senior Care Life Settlement, a program similar in many respects to the original. It is estimated that 40% of people who go on Medicaid have life insurance and that seniors own more than $230 billion worth of death benefit.
Other Options for Long-Term Care Expenses
Life Insurance With A Long-Term Care Rider. Some life insurance products have the option to add a rider to the policy that will allow the policyholder to utilize the death benefit for long term care, should the insured qualify for the services. A benefit of this option is that in the event that the insured does not require LTC services, the policy still pays out a death benefit just like a typical life insurance policy would.
Annuities. If an individual was in the market for a LTC insurance policy but found they couldn’t pass the medical underwriting, an annuity may be an option. This solution has the added benefit of not being at risk of the (likely, and steep) premium increases that burden so many LTC insurance policies—but an annuity does require a lump sum investment at the outset of the contract. The annuity payout depends on what interest rates are at the time the annuity is purchased.
Accelerated Death Benefit. Some life insurance policies, even without a long-term care rider, allow for an accelerated death benefit if the insured’s health meets certain requirements. Typically, these requirements are that the insured has either a chronic or terminal illness from which the insured is not expected to recover.
The Bottom Line
Q Life Settlements is here to answer your questions regarding life settlements in general, or to discuss the specifics of your unique case. Is a broker better for your policy, or a provider, what is a realistic valuation? Give us a call or fill out the form below and one of our life settlement experts will gladly help!
Interested in learning more about life settlements? Start by finding out how much your life insurance policy may be worth with our life settlement calculator. From there, reach out to the Q Life Settlements team, email us at firstname.lastname@example.org, or call us at 866-679-9410 to begin the application process.
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.