Paying for Long-Term Care With Life Insurance

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Regardless of how healthy and fit you are now, the chances are good that you or your spouse may need some form of long term care in the future. According to statistics from the Family Caregiver Alliance, the lifetime probability of someone age 65 or older becoming disabled in at least two activities of daily living (such as bathing, dressing, toileting, and eating) or of being cognitively impaired is nearly 70 percent.

First, know exactly how much you may spend on long-term care: According to the US Department of Health and Human Services, long-term care costs nearly $7,000 per month for care in a nursing home, or $21 an hour for care inside the home, and health insurance—including Medicare—tends to have limits or exclusions on long-term care. While many seniors assume Medicare will cover extended care, Medicare funds medical needs only. It excludes many types of long-term care if it’s needed primarily to assist you day-to-day. That means you could quickly drain your life savings on the care you need in your final years—or struggle with paying for care at all.

While long-term care insurance policies exist, these products have very high premiums—the last thing you need when your whole goal is to shore up your savings so you have enough to comfortably retire. That’s why some people turn to their life insurance policy to pay for long-term care, either through a rider or by cashing out a policy to pay for care. Here are four ways you could use your life insurance to help pay for long-term care.

1. Adding on to your current life insurance policy

Talk to your financial advisor or insurance broker about what your current policy does and does not cover, so you’re clear on what you may need to add (and how your premiums will be affected) were you to include long-term care coverage in your policy. For example, you may be able to attach an accelerated death benefit (ADB) rider. This allows you to receive cash advances against the policy’s death benefit to pay for care in the case of terminal illness. This rider sometimes requires an additional premium.

2. A life insurance/long-term care combination policy

These policies tend to be sold as a life insurance policy with a long term care rider attached. The policies are usually pricey—often paid in a single premium of upwards of $75,000—but can offer around six times the premium in long-term care benefits. If the long-term care benefit is never used, the policy will pay out a death benefit instead. Combination policies differ, and an insurance broker can run through all the possibilities, but typically, the death benefit might be roughly 30 percent more than the premium. So a policy with a $75,000 premium could pay up to around $450,000 in long-term care benefits, and if those benefits aren’t used, the death benefit might be up to $115,000.

If you do end up using the long-term care benefit, the policy death benefit will be reduced depending on how much care is used, although some policies have a guaranteed percentage death benefit regardless of care. A third option in some combination policies is offering a full return of the premium after a certain length of time has passed.

3. Life settlements

This allows you to sell your life insurance policy for cash. Downsides: This money may be taxed, and, since you no longer have a life insurance policy, there won’t be a death benefit for your beneficiary. And of course, you can’t predict in advance just how long or how expensive long-term care will be. Once the cashed-out money from your policy is gone, it’s gone.

4. Viatical settlements

Similar to a life settlement, a viatical settlement is a way to cash in on your insurance policy. Unlike a life settlement, this is tax free. In this scenario, you sell your life insurance policy to a third party company, so they are both the owner and beneficiary of the policy. This option comes into play for terminal illnesses, such as cancer or a terminal diagnosis of less than two years, but candidates are not always approved depending on their medical situation.

Bottom line: Whether long-term care is self-financed, paid through insurance, or a combination, there are many paths to ensure you get the care you need. Speaking with a financial advisor about what-if scenarios can be helpful in getting a clearer picture of how your finances would function (for both you and your heirs) were the worst to happen. Comparing options, educating yourself, and finalizing your decision well before it is needed assures peace of mind.

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