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Pros and Cons of Life Insurance with a Long Term Care Rider

Clifford PendellWritten by Clifford Pendell, Managing Partner and Co-founder

Should you consider buying life insurance with a long term care rider?

A recent survey shows that almost 70% of Americans will require long term care at some point in their lives.

Current costs for long term care facilities can run anywhere between $80,000 - $150,000 annually in a semi-private or private nursing home.

If you calculate that figure with the average stay of approximately 3 years, it comes to quite a significant sum.

So...it makes sense to consider purchasing a life insurance policy with long term care benefits if you don’t have other plans in place.

But, as any independent agent here at JRC will tell you, you have to be very cautious about the type of long term care coverage you buy.

Why? The reason being, there are many different types of long term coverage products and the prices and pitfalls that accompany them may be considerable.

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Types of Long Term Coverage Riders

There are essentially 3 ways you can buy long term coverage. These include:

  1. A Stand Alone Long Term Care (LTC) insurance policy
  2. An Annuity with LTC Benefit
  3. A life insurance policy with a LTC rider or accelerated death benefit, also known as a “Hybrid Life Insurance Policy”

Pros and Cons of a Stand Alone LTC Policy

The truth is, there are not many pros to discuss when it comes these policies, and most analysts suggest you should avoid stand alone policies altogether. The following drawbacks include:

  • Stand alone LTC policies can be very expensive to purchase
  • These types of policies have no cash value
  • Premiums tend to increase
  • Underwriting can be time consuming
  • You have to be healthy to qualify
  • If you can no longer afford the policy and cancel, all the money you paid into it is wasted
  • People generally don't like the “use it or lose it” nature of these benefits
Many insurers have come to realize that this type of stand alone policy has become unattractive to buyers, so they have developed more user-friendly annuity and hybrid life insurance packages.

However, even if you opt for the annuity or hybrid long term care insurance products, we must stress again that these products vary quite significantly in regard to offerings and cost. Don’t just jump on the bandwagon and buy the first product that you look at.

The first thing to consider is the size of the policy that you would like to buy. Keep in mind that you have to be able to maintain your policy payments long term, and a smaller policy may be more suitable for you especially if you are budget conscious.

Annuities with Long Term Care Coverage

Many people buy what is known as "fixed annuities” or “deferred annuities,” which are designed to provide an income stream for life.

Although they may appear less than attractive in the current low interest market, buying a LTC annuity may be a good option to achieve financial income along with long term coverage care. 

Annuities generally tend to be much less expensive than buying stand alone LTC coverage. There are some annuities that now offer tax incentives for long term care benefits.

There are some products available which allow you to invest the premiums you pay for long term care and apply them towards a fixed income, while providing higher payouts should you require long term care.

This can result in doubling or even tripling what is available when you do require to access long term care benefits.

Another pro is that with a hybrid annuity policy (if you don’t need the LTC benefits), the full value of the annuity can be used either by yourself or your beneficiaries.

The one con connected to this type of policy would be that it's subject to interest rate fluctuations, which are currently on the low side.

Some insurers will allow those with an existing annuity to switch over to a hybrid package with long term care coverage. This is also a feature which you may want to consider if you are thinking about buying a stand alone annuity, but make sure the insurer has this option included.

Hybrid Long Term Care Life Insurance Policy

Now, before we explain the ins and outs of hybrid policies, there are 2 primary types you need to understand:

  1. Life Insurance with an Accelerated Death Benefit Rider, which can be used for qualified long term care needs. In this case, if the insured needs in-home care or nursing home care, they pull the money from their life insurance policy and it reduces their death benefit. In other words, no new money is being created here, so it's not actually LTC coverage. It's just accelerating your death benefit. This is typically a FREE rider, although not all companies offer it yet.
  2. Life Insurance with a LTC Rider - this is a policy that has LTC benefits built into the policy, but at an additional cost.
In both cases, LTC riders don’t usually include term policies (Prudential is the only carrier who has a Living Needs benefit on their term policies) and generally are only available with permanent policies such as Universal Life, Indexed Universal Life and Whole Life policies.

American General, OneAmerica, and United of Omaha offer the best permanent life insurance with a long-term care rider. With these companies, you have an option to surrender your policy for money. OneAmerica's policy is the most flexible because you can surrender your policy at any time.

With American General and United of Omaha, you have the option to have all of your premiums refunded to you, but you must keep your policy for at least 20 or 25 years to exercise this option. If you stop making payments before then, your coverage and your cash are gone.

More on Accelerated Death Benefit Riders

...hybrid life insurance and long-term care policies give the policy owner access to the majority of the death benefit if long-term care services are needed. New and Unexpected Ways to Fund Long-Term Care Expenses, Jamie Hopkins, Forbes
When you require any benefits paid out under these hybrid life insurance policies, you essentially receive accelerated benefits that would have been available to your beneficiaries under ordinary circumstances.

This means that your death benefits are reduced equivalent to what you receive for long term coverage.

Be cautious though, some insurers will only qualify your LTC coverage for a percentage of your death benefits which you receive on a monthly basis. This may result in the amount received being insufficient for your long term care costs.

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Some insurers also may add a percentage cap where the maximum amount you can use towards LTC would be no more than 50% of the total amount of the death benefitson your policy.

Cons of Annuity and Life Insurance Hybrid Long Term Care Riders

There are several things to keep in mind when considering these types of hybrid long term care riders:
  • Life insurance hybrid packages will result in the reduction of you death benefits which could affect the income you plan to leave to your survivors or towards future estate taxes
  • If using an annuity, how will the reduced amounts used towards LTC affect your retirement income?
  • The amounts you receive with a hybrid insurance policy may not provide enough coverage towards your LTC needs because of the cap and percentage amounts provided
  • Although many of these types policies have some form of inflation protection built into them, will it be enough to cover the rising costs of long term care coverage down the road?

The Bottom Line on Long Term Care Riders

First off, almost everyone should have some long term coverage in place because most people are going to need it at some point in their lives.

Types of coverage, policies and costs vary wildly between insurersso you need to sit down with a knowledgeable independent agent to fully understand your choices and your life insurance needs before you select a long term care coverage option.

We have access to dozens of life insurers so we can help you find the right type of life insurance long term care coverage that you need right now.

Give JRC a call on our toll free number: 855-247-9555 and we’ll listen to your life insurance needs and goals, and work within your budget to find the best possible solution.

Our comparative shopping services are completely free, and there is no cost to apply for coverage. Give us a call today, or you can request a free online quote below to compare rates from more than 50 life insurance companies in less than a minute.

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Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

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Questions From Our Visitors

Some of the questions we received from our website visitors:

Chuck Juan:

I have looking into a life ins. + LTC rider from Transamerica, as part of the plan, I was told that I can convert my existing LifeIns with MetLife with a 1035 form???? to help with the premium Wondering if you have any info about this type of policy. and If there are any Pros and Cons I need to consider.

Randy McClintickRandy McClintickChairman & Co-founder

Mr. Juan, Thank you for your question. A few companies offer life insurance including Long Term Care (LTC) riders. These features and options can vary considerably, as well as how policies are treated as part of a conversion from existing life insurance. Give JRC a call at (855) 322-0782 and our conversion expert, Jason Dana, will help you.

T Reece:

Is there a minimum amount of life insurance one would have to take out in order to get the LTC Rider and if so how much would the life ins. be and what would the LTC Rider be worth if needed?

Randy McClintickRandy McClintickChairman & Co-founder

Thank you for your question and visiting JRC’s life insurance website. The minimum amount of life insurance including a Long Term Care rider and its cost will vary by a number of factors including your state of residence, age and health factors. The "LTC" coverage also varies by insurer. Call JRC Life Insurance services at (855) 247-9555 and we'll be able to sort through this for you over the phone, and then email detailed information if you're interested in reviewing further and/or applying for coverage.

jim:

why shouldn't I just invest in mutual funds rather than letting an insurance company have my money ?

Randy McClintickRandy McClintickChairman & Co-founder

Jim, Thanks for your question and visting JRC's life insurance site. We generally recommend purchasing low cost term life insurance to protect your family in case you die prematurely while they're financially dependent upon you and your income, and investing additional fund independently as you're able. Investments through insurance companies can be expensive, generally carrying high management fees and penalties to discontinue, reducing your returns.

Penny Vance:

I need help understanding the terms in my mothers long term care insurance. I have been caring for her for years and fear she has many more benefits than I am using, How can I get help?

Randy McClintickRandy McClintickChairman & Co-founder

Ms. Vance, Thank you for your question and visiting JRC's life insurance website. Long term care benefits can vary widely. Best to review you mother's policy and if additional help is needed, contact the insurance provider and/or your state's insurance commission. Best of luck, and have a happy Thanksgiving.

Jerry:

Re: Life insurance policy with a long term care rider.. of course death benefits on this policy are tax free, but are distributions as part of the LTC rider taxable to the extent paid to owner prior to death?

Randy McClintickRandy McClintickChairman & Co-founder

Mr. Jenkins, Thank you for contacting JRC Life Insurance and visiting our website. It appears you're a CPA...we always recommend checking with a tax professional as deductibility laws evolve year to year. Following is an article we've found regarding Long Term Care premiums/proceeds for 2018: IRS Issues Long-Term Care Premium Deductibility Limits for 2018. Long Term Care Insurance (LTCI) remains one of the most tax advantaged planning solutions available. Not only are the benefits paid tax-free (IRC 7702b), but policyholders may deduct some or all of their premiums. https://www.newmanlongtermcare.com/2016/11/irs-issues-long-term-care-premium-deductibility-limits-for-2018/

Julie:

Can you make a general comment on the quality of Lincoln Financial's Money Guard II hybrid policy? Thanks.

Randy McClintickRandy McClintickChairman & Co-founder

Ms. Hartman, Thank you for your question and visiting JRC's life insurance website. Lincoln Financials Money Guard Guard II policy is a good option for someone who is mainly concerned about Long Term Care. Unlike traditional Long Term Care insurance the premiums are guaranteed. Even if long term care is never needed a benefit will still be paid out in the form of a death benefit, another advantage over traditional Long Term Care insurance. Lincoln Financial is one of several companies that we have offering this type of product. Give us a call at (855) 247-9555 and an agent licensed for your state will help you review your options. Best Regards, JRC Life Insurance Services (855) 247-9555

Mark Schlichting:

Interested in this type of insurance

Clifford PendellClifford PendellManaging Partner and Co-founder

Hi Mark, One of our licensed agents would be happy to help you. Please call us toll-free at: 855-247-9555 and we'll help you find the best policy for your needs and health profile. Thanks for visiting JRC! Cliff Pendell

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