Even though the cost of long-term care (LTC) is rising, many people can’t see the advantage of paying into long-term care insurance, designed to cover the costs of long-term care services, for years. It’s a complicated decision weighing the costs against the possibility it will never be used. The right decision for you and your family is a highly personal one and one that may not be clearly evident, except in hindsight. But if you were one of the nine million Americans who needed long-term care in 2012 — 40 percent of whom had income below 150 percent of the federal poverty level — you’d wish you’d had a way to pay for it.
It’s estimated that 40 percent of people who reach age 65 will need nursing home care in their lifetime (Medicare.com), at an average cost of $6,500 a month (Genworth 2012 Cost of Care Summary), not including medical or health expenses. If you don’t have a long-term care policy, you may want to explore other options for paying for this care. Otherwise, you or your dependents will be evaluating your possessions and selling them to cover the high costs of care.
Purchasing long-term care insurance is not the only way to pay for long-term care. There are multiple ways to use your life insurance policy to pay for your future care needs.
Life and Long-term Care Combination Policies
Recently, some insurance companies have combined life insurance and long-term care insurance into a single option, thus the consumer is guaranteed that a benefit will always be paid. This hybrid or combo policy is becoming increasingly more popular.
Your long-term care benefit typically begins paying out when you are unable to complete two or more “activities of daily living.” You will have a set monthly benefit and there may be a waiting period depending on your policy.
Many owners of long-term care policies have faced large premium increases of as much as 45 percent. This makes the policy difficult to afford for those on a fixed income. These life-combo policies guarantee premiums will stay the same.
Insurance companies may offer different amounts of pay-out but generally the long-term care insurance component is calculated as a percentage of the life insurance benefit portion. If you are looking into this option, you’ll be making a choice between a larger monthly payment for your long-term care needs or a larger end benefit for your beneficiaries.
If your combo policy contains a long-term-care rider called an “indemnity” benefit, you can place the insurance policy in an irrevocable trust. Then you can use the accelerated death benefit for long-term care. This means your beneficiaries will receive whatever is left tax-free. This amount won’t factor into your estate, yet another benefit for your survivors.
These indemnity plans pay the benefit to the owner of the policy, which in this case is the trust. Keep in mind, the trust could be disqualified if the policy is paid directly to the insured.
Sale of Life Insurance Policy
If you are a man over age 70, or a woman over 74 years old, you may be eligible to sell your life insurance policy for its current value. The upside of this is an influx of cash and there’s no health screen necessary. You can sell your policy regardless of your physical condition.
Be aware that selling your policy may mean there will be little to no benefit paid out to your survivors so you may want to consider providing for your final arrangements. Also, the proceeds you receive are taxable.
Similar to the sale of your life insurance policy, viatical settlements, or life settlements, refer to the sale of your insurance policy to a third-party for more than the cash surrender value but less than the death benefit (based on life expectancy).You must have a terminal illness and have a life expectancy shorter than two years.
Unlike the sale of your life insurance policy, the proceeds of this sort of sale are tax-free. If you use this policy to pay for long-term care insurance, you do not have to meet the health requirements for long-term care insurance.
Accelerated Death Benefits (ADB)
Some insurance policies allow you to receive partial payment prior to your death if you meet one of the following conditions. You may qualify if you:
Are terminally ill
Have been diagnosed with a life-threatening condition
Require long-term care services for an extended period of time
Need the services of a nursing home because you are unable to physically take care of yourself
If you qualify for this benefit, you will receive a tax-free payment that can be used for long-term care. Depending on the amount paid out, your beneficiaries may receive a portion of the benefit after your passing.
You’ll need to check with your policy as sometimes an additional premium is charged for this feature. Also, most — but not all — policies cap this benefit at 50 percent of the death benefit.
The other benefit to ADB is that if you apply for Medicaid as part of the long-term care process, your policy does not count as an asset because it no longer belongs to you. It belongs to the third-party who purchased your policy.
As mentioned above, it is impossible to know whether you or your loved ones will need long-term care. As life expectancy rates increase, and families no longer live in the same community — let alone the same state — the idea of your children taking care of you in your old age is increasingly unlikely.
With the U.S. average cost of care hovering around $6,500 a month, it would not take long to deplete your savings.
While many long-term care policies become cost prohibitive for seniors, there are ways to cover your long-term care needs without a traditional LTC policy or becoming a burden to your loved ones. Knowing the options available will suit you to discuss your future care and make the right decision for you and your family.
Call us today for a quote at 1-888-552-6159.