Life Insurance With Long Term Care Rider

    Life Insurance With A Long-Term Care Rider: How Does It Work?

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    Not many people realize they might need long-term care services (LTC) in the future. The fact of the matter is, 52% of people over 65 will eventually need some form of care at some point in their lives.

    If you don't want your family to shoulder the costs of long-term care, you can consider getting a life insurance policy with a long-term care rider. This type of insurance will serve as a financial safety net while you're young and provide you with the means to pay for care services when you grow old.

    In this guide, we'll discuss what long-term care riders are and how they work. We'll also answer some of the most frequently asked questions on the topic.

    What Is A Long-Term Care Rider?

    A life insurance policy pays out a death benefit in case the insured person dies within the coverage period. The benefit can range from $5,000 to $1,000,000, depending on the individual's contract with the life insurance company.

    When you purchase life insurance policies, your agent or the life insurance company will ask you to choose which riders you want to add on. These riders are policy features that give you access to more benefits. The more riders you add, the higher your premiums will be.

    An LTC rider allows the insured individual to claim a portion of their policy's death benefit to cover their long-term care costs. This makes paying for traditional long-term care services easier, but it will also reduce the death benefit that your beneficiaries can receive.

    This life insurance policy feature covers:

    • Long-term care facility confinement
    • Home healthcare service
    • Home care service
    • Adult daycare
    • Hospice care
    • Respite care

    An LTC rider also enables you to withdraw money from your policy's cash value. The cash value is another component of insurance that's separate from the death benefit, so withdrawing cash value will not reduce the amount of money your beneficiaries will receive after you die.

    Generally, it's easier to find long-term care coverage bundled with permanent life insurance (e.g. whole, universal, variable life insurance policies). A term life insurance policy with a long-term care benefit is less common.

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    How Do Long-Term Care Riders Work?

    Long-term care riders come into effect when an individual needs assistance with activities of daily living (ADL), which are:

    • Eating
    • Bathing
    • Maintaining continence
    • Toileting
    • Dressing
    • Transferring (moving from place to place)

    To claim long-term care benefits, a medical professional must certify that the insured individual needs help with at least two ADLs. There's also a 30, 60, or 90-day waiting period (or elimination period) before care benefits can be released. During this time, the policyholder has to pay for long-term care out-of-pocket.

    The waiting period starts after you get an injury or an illness that will require you to receive long-term care. The shorter the waiting period, the higher your premiums are likely to be. Keep in mind that some insurers count “days” as “service days” and not calendar days. So, if you only receive care a few times a week, you might have to wait more than 90 days.

    LTC riders are similar to accelerated death benefit riders in the sense that both allow you to benefit from your policy while you’re alive. However, the qualifications are slightly different. 

    To activate your life insurance policy's accelerated death benefit, you need to be diagnosed with a terminal illness. To trigger your long-term care rider, all you need is a chronic illness, condition, or accident that makes you unable to take care of yourself.

    The funds given to you are withdrawn from your life insurance policy's death benefit. It's possible to withdraw the entire amount to help pay for your long-term care needs. Some insurers will still provide a guaranteed death benefit of $15,000 to $20,000 if you’ve used up your benefits for long-term care. Always clarify this with your insurance company or agent before opting for a long-term care rider.

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    What's Covered By Long-Term Care Insurance Policies?

    A long-term care rider can help you if you get diagnosed with a chronic illness that prevents you from completing some ADLs. This includes:

    • Alzheimer's disease
    • Asthma
    • Arthritis
    • Cancer
    • Crohn's disease
    • Cystic fibrosis
    • Epilepsy
    • Diabetes
    • HIV/AIDs
    • Heart disease
    • Mood disorders
    • Multiple sclerosis (MS)

    The illnesses or physical conditions that activate your long-term care rider can vary depending on the insurer. Review your contract carefully, so you know exactly which scenarios give you access to long-term care benefits.

    Understanding Long-Term Care Costs

    According to a 2019 survey, these are the median costs of care services per month:

    • $4,051 for an assisted living facility
    • $4,385 for a home health aide
    • $8,517 for nursing home care

    Keep in mind that these are present-day rates for traditional long-term care, excluding weekends/holidays, food preparation, and housekeeping. It's estimated that long-term care expenses will almost double in the next two decades. This roughly translates to $100,000 to $200,000 per year for a 50-year-old in 2020 who will require long-term care in their 70s.

    Most long-term care insurance policies will also allow you to use the money for renovations if it will make it easier for you to receive care at home.

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    Long-Term Care Rider Benefit Payout Options

    There are two types of long-term care policies: indemnity and reimbursement plans. Here is a quick outline of each.

    Indemnity Policy

    For this type of policy, you can get anywhere from 1-4% of your policy's death benefit every month, depending on what's stipulated on your long-term care insurance contract. If your care needs exceed this amount, you'll have to pay the rest out-of-pocket.

    You also have the option to take less than the maximum monthly benefit. For example, let’s say your care expenses for a month only cost $500, but you're entitled to receive $4000. You can ask your insurance company to pay only $500 for that month, allowing you to “save” your benefits for when you really need them.

    Reimbursement Policy

    As the name suggests, reimbursement policies only pay you back for the actual cost of care. For example, if you paid a nursing home $4,000 for this month, then your life insurance company will pay you back the same amount. You'll need to provide receipts or other documentation to claim your reimbursements.

    Benefits Of Buying Life Insurance With A Long-Term Care Rider

    There are several advantages that come with purchasing life insurance with long-term care benefits:

    Peace Of Mind

    According to the US Department of Health and Human Services, families end up paying about half of an individual's long-term care expenses out-of-pocket. This can amount to about $100,000 every year.

    With a care policy, you never have to worry about burdening your loved ones with the costs of long-term care.

    Steady Premium Rates

    Standalone LTC insurance policies usually have premiums that increase yearly. In contrast, life insurance plans with LTC riders usually have consistent premiums. This means you don't need to stress about how much you will pay for long-term care services as the years go by.

    Guaranteed Benefit

    Whether or not you need long-term care services in the future, you'll still get a return on the premiums you've paid. Your beneficiaries can still claim the life insurance death benefit even if you don't end up using your long-term care rider.

    Flexibility

    Most life insurance companies allow you to customize the long-term care benefits you can get from your policy. For example, you can change how much you'll receive monthly.

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    Frequently Asked Questions

    There are many factors you have to consider before you buy life insurance with long-term care coverage. To help you make the right decision, we've answered the most frequently asked questions on the topic.

    Will Medicare/Medicaid cover long-term care?

    Medicare only pays for short stays in nursing facilities that focus on rehabilitation and therapy. It does not cover LTC because getting help with activities of daily living (e.g. bathing, cooking, eating) is not considered medical care.

    Medicaid, on the other hand, does offer long-term care coverage but only for those who need to be in a nursing home. You'll also need to meet your state's requirements.

    Does having a long-term care rider affect Medicaid eligibility?

    The money you get from your life insurance with a long-term care insurance rider can be considered income – therefore, it may affect your Medicaid eligibility. It's best to consult a CPA lawyer for more information about this matter.

    Is a long-term care insurance policy rider different from a chronic illness rider?

    A long-term care insurance rider can be activated as long as you have a disability or illness that makes it impossible for you to perform two out of the six activities of daily living. Even if you expect to recover from the disability, the insurance company will usually allow you to claim your long-term care insurance rider benefits.

    In comparison, a chronic illness rider will only pay out part of the death benefit when you have a qualifying chronic illness.

    Should I buy a rider or a standalone long-term care policy?

    When deciding between a long-term care rider and a standalone long-term care insurance policy, you should consider your beneficiaries. How much do they need the death benefit to maintain their financial security after you pass away?

    If your loved ones will need the full face value of your life insurance policy to cover their daily living expenses, then you could buy a long-term care policy as well as a separate life insurance policy. This guarantees that your beneficiaries get the full death benefit upon your passing, even if you claim your long-term care benefits. The downside is that you'll have to pay premiums for two separate insurance products.

    But, if you have other ways of providing for your family’s financial security, even if you use up the life insurance policy for long-term care, then a rider may be enough for you.

    What is the application process for a long-term care rider?

    A life insurance policy and a long-term care rider have separate underwriting processes. It's possible to qualify for life insurance but get denied for a long-term care rider.

    The insurance company may require you to undergo a telephone interview, cognitive screening, and medical exam. Your application may be denied if the insurance company finds that you have pre-existing illnesses or mental conditions that make you more likely to need long-term care in the future.

    Can a long-term care rider be added to an existing life insurance policy?

    Most life insurance companies only allow you to get the long-term insurance rider when you purchase a new policy. It cannot be added later.

    One option you can consider is to exchange your current policy for a new one with the LTC rider. Consult your agent or the insurance company regarding this matter.

    Does the LTC rider cover care services from family members?

    No. Your insurance company will only help pay for services performed by professional LTC providers.

    Can I terminate the LTC rider after my policy has been issued?

    Yes, you may ask your insurance company to remove the LTC rider from your existing policy. You will no longer be entitled to care benefits, but you'll also stop paying any LTC rider charges.

    Keep in mind that different insurers have different policies on terminating your LTC rider, so clarify this matter with your agent.

    Are benefit payments taxable?

    LTC benefits are usually not taxable, as long as they don't exceed HIPAA per diem limits.

    Are LTC rider premiums/charges tax-deductible?

    No. LTC rider charges are not considered medical expenses and cannot be considered tax-deductible.

    Will my benefits be adjusted for inflation?

    Some insurance companies offer inflation protection as part of their LTC rider. According to the Insurance Information Institute, it's best to have a policy that compounds benefits at 5% per year.

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    Final Thoughts

    A life insurance policy with a long-term care rider can help you if you get into an accident or develop a chronic illness that prevents you from performing basic tasks. Compared to buying separate life insurance, getting this "combo policy" will help you save on premiums.

    If you want to learn more about how a life insurance policy with a long-term care rider can benefit you, get in touch with Wesley. We'll be more than happy to answer your questions on life insurance and the riders you can add to your policy.

    Written By Cameron McDowell
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