Life Policies Plus Long-Term-Care Benefits
It may be hard to fathom, but the median annual cost of a private room in a nursing home has surpassed $90,000, and the median cost of a home health aide is already more than $45,000 a year.1
If you expect to pay for long-term care out of pocket, it might be wise to consider whether your financial resources could withstand a worst-case situation. What would happen to your retirement savings if you or your spouse became severely disabled and had to enter a nursing home? How would writing a check for $6,000 or more every month affect the standard of living of the healthy spouse, who would still need to pay for his or her normal expenses?
Many families purchase long-term-care (LTC) insurance to help cover this financial risk, but some people may be uncomfortable with traditional LTC policies because annual premiums might increase over time, and there’s a chance they will never need custodial care.
Here are two life insurance strategies that may help prevent your savings from being depleted by the escalating cost of long-term care.
Tack on a Rider
An accelerated death benefit (ADB) rider attached to a permanent life policy allows the insured to begin receiving benefits while he or she is still living, under specific circumstances. In the past, ADB riders paid only when a policyholder was diagnosed with a terminal illness. More insurers are now offering ADB riders that start paying when a policyholder is diagnosed with a chronic illness, is permanently disabled, or needs to enter a nursing home.
However, any payouts for covered expenses reduce (and are usually limited to) the life insurance death benefit that would go to heirs, and they are typically much less generous than those of a traditional long-term-care policy. Optional benefit riders are available for an additional cost and are subject to the contractual terms, conditions, and limitations outlined in the policy; they may not, however, benefit all individuals.
An Efficient Hybrid
Hybrid life–LTC policies combine permanent life insurance and long-term-care coverage. Many of these policies require a substantial up-front premium, but buyers don’t have to worry about future rate increases or the issuer canceling the policy.
For the same premium, a hybrid policy typically has a smaller death benefit than a life policy with an ADB rider, but payouts for covered long-term-care expenses could be greater than the death benefit. Long-term-care benefits typically kick in when the policyholder needs help with two or more activities of daily living (such as eating, bathing, and dressing).
The danger in waiting to explore your LTC options is that you could develop a debilitating illness at any time that would disqualify you from obtaining coverage and saddle you with overwhelming health expenses. However, if you consider a hybrid life–LTC policy or a life policy with an accelerated death benefit rider, you should have a need for life insurance and evaluate the policy on its merits as life insurance.
Another advantage of these strategies is that policyholders can still tap into the cash value of the permanent life policy during retirement if money is needed for income or emergencies. Loans and withdrawals will reduce the policy’s cash value and death benefit.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. In addition to the life insurance premiums, other costs include mortality and expense charges. If a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.