You can use your life insurance policy to help pay for long-term care services through the following options:
- Combination (Life/Long-Term Care) Products
- Accelerated Death Benefits (ADBs)
- Life settlements
- Viatical settlements
Many consumers are reluctant to buy long-term care insurance because they fear that their investment will be wasted if they do not use it. Some insurance companies have attempted to solve this problem by combining life insurance with long-term care insurance. The idea is that policy benefits will always be paid, in one form or another. These products are relatively new and the features are changing as the product evolves. The amount of the long-term care benefit if often expressed in terms of a percentage of the life insurance benefit.
How combination policies work
Combination long-term care/life insurance policies pay for long-term care that regular health insurance or Medicare won’t cover. And if you don’t max out the long-term care benefits, the insurer pays a benefit to your beneficiary upon your death.
Also called linked or asset-based policies, combination products work this way:
- Depending on the policy, you pay one lump-sum premium or a few large annual premiums — typically for fewer than 10 years, according to LIMRA, an industry research and consulting group. The average cost of a single-premium combination policy is $75,000, according to the American Association of Long-Term Care Insurance.
- The policy provides a pot of money for long-term care that’s equal to several times your premium payments.
- The policy’s death benefit will be reduced — which means less money for your beneficiary — according to how much of the long-term care benefit you use. Some policies guarantee a small percentage of the full death benefit, such as 10%, even if you use all the money allocated for long-term care.
- You’ll need to supply medical records and take a medical exam to qualify for some combination policies. Others offer “simplified underwriting,” which means you may only need to answer health questions over the phone. If you’re healthy, you’ll pay less for coverage if you buy a policy that requires both an exam and submission of medical records.
Combination policies differ, but here’s a hypothetical example for a MoneyGuard II policy from Lincoln Financial: A 60-year-old female nonsmoker pays a single $100,000 premium for up to $453,783 in long-term care benefits, or almost 4.5 times the premium. Long-term care benefits could pay out for up to six years, at up to $6,303 per month. If she never used the policy for long-term care, it would pay a death benefit of $151,261 to her beneficiary. And after year five, she could get her $100,000 back if she didn’t want the policy any longer and hadn’t used any of the long-term care benefits.
Sales of combination long-term care/life insurance policies have taken off. More than 260,000 combination policies were sold in 2017, up from 15,000 policies sold in 2007, according to LIMRA.
The appeal of combination policies
Aside from the fact that you get something for your premium no matter what, the biggest advantages of combination policies are:
- The policy can be a good investment if you otherwise would have spent the money or kept it in a low-yield account.
- You won’t have premium hikes when you pay with a lump sum, and a policy with a limited number of payments might even guarantee the premiums will stay the same. Some owners of traditional long-term care insurance policies have seen their premiums double within the past several years as care costs have surpassed insurance companies’ projections. And with historically low interest rates, insurers haven’t made enough investment income off of premiums to pay claims.
- There’s a money-back guarantee with some combination policies. The insurance company will return your premium if you decide you don’t want the policy after a certain period of time, such as five years. Before then, you can get a percentage of the premium back.
Accelerated Death Benefits (ADBs)
A feature included in some life insurance policies that allows you to receive a tax-free advance on your life insurance death benefit while you are still alive. Sometimes you must pay an extra premium to add this feature to your life insurance policy. Sometimes the insurance company includes it in the policy for little or no cost.
There are different types of ADBs each of which serves a different purpose. Depending on the type of policy you have, you may be able to receive a cash advance on your life insurance policy’s death benefit if:
- You are terminally ill
- You have a life-threatening diagnosis, such as AIDS
- You need long-term care services for an extended amount of time
- You are permanently confined to a nursing home and incapable of performing Activities of Daily Living (ADL), such as bathing or dressing
GOOD TO KNOW
The amount of money you receive from these types of policies varies, but typically the accelerated benefit payment amount is capped at 50 percent of the death benefit. Some policies, however, allow you to use the full amount of the death benefit.
For ADB policies that cover long-term care services, the monthly benefit you can use for nursing home care is typically equal to two percent of the life insurance policy’s face value. The amount available for home care (if it is included in the policy) is typically half that amount.
For example, if your life insurance policy’s face value is $200,000, then the monthly payout available to you for care in a nursing home would be $4,000, but only $2,000 for home care. Some policies may pay the same monthly amount for care, regardless of where you receive the care.
When you receive payments from an ADB policy while you are alive, the amount you receive is subtracted from the amount that will be paid to your beneficiaries when you die.
Key things to consider before taking advantage of an ADB policy include:
- If your life insurance policy includes an ADB feature, you may be able to use your life insurance policy to help cover long-term care services. Depending on the policy amount, there may be little or no health screenings required. So if you have a health condition that might exclude you from long-term care insurance eligibility, you can still obtain a long-term care insurance policy through the ADB feature on a life insurance policy.
- ADB policy payouts for long-term care services are often more limited than the benefits you could receive from a typical long-term care insurance policy.
- The face value of your life insurance policy may not be enough to allow ADB payments that are enough to cover your long-term care services needs. The benefit payments may be too low and the duration may be too short to cover your long-term care services expenses.
- ADB riders on life insurance policies may not offer inflation protection. If the policy does not include inflation protection, the ADB payment may not be sufficient to cover your future long-term care service costs.
- If you want to leave an inheritance, you should consider whether using your life insurance death benefit to pay for long-term care services is the right option. If you use the ADB feature for long-term care services, there may be little or no death benefit remaining for your survivors.
- Using the ADB option may affect your eligibility for Medicaid. Check with your state Medicaid agency for more information.