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.
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.
Quick Article Guide:
1. Types of Long Term Coverage Riders
2. Pros and Cons of a Stand Alone LTC Policy
3. Annuities with Long Term Care Coverage
4. Hybrid Long Term Care Life Insurance Policy
5. Cons of Annuity and Life Insurance Hybrid Long Term Care Riders
6. The Bottom Line on Long Term Care Riders
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There are essentially 3 ways you can buy long term coverage. These include:
- A Stand Alone Long Term Care (LTC) insurance policy
- An Annuity with LTC Benefit
- A life insurance policy with a LTC rider or accelerated death benefit, also known as a “Hybrid Life Insurance Policy”
To be honest, 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.
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.
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.
Now, before we explain the ins and outs of hybrid policies, there are 2 primary types you need to understand:
- 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.
- 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 benefits on your policy.
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?
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 insurers so 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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