Should you purchase long-term care insurance? What if, ultimately, what you buy does not cover all of the costs of care that you will need, or what if you end up not needing the insurance after paying out years and years of premiums? Instead of agonizing over this decision, what if you could leverage your life insurance policy to basically cover long-term care expenses when the time comes (if it comes). Can you do that?
Traditional life insurance policies pay a death benefit to the person designated as the beneficiary of the policy when the insured person dies. That payment helps a surviving spouse or child when you die but it does nothing to help you while you are still alive.
Long-term care insurance is an option for people who want to be certain that their care needs are met as they grow older. Some people are reluctant to buy long-term care insurance because they cannot predict whether they will need it. Some seniors are able to live independently in their own homes until they die. Others need only minimal assistance that children or neighbors are able to provide. You might worry about paying for long-term care insurance that you will never use.
If you do not want to buy a long-term care policy, you might instead want to purchase a life insurance product that will help you finance long-term care. You might also think about selling your existing life insurance policy and using the proceeds to pay for long-term care. This article explores those options.
Accelerated Death Benefits
A “death benefit” is the payment that a life insurance policy makes to your beneficiary when you die. A life insurance policy that includes accelerated death benefits (also called “Living Benefit“) allows you to take part of that benefit for your own use while you are still living. The money you take is treated as a cash advance and is deducted from the benefit that is paid at the time of your death. The cash advance is not taxed.
Your entitlement to take a cash advance depends upon the terms of your policy. A policy that includes accelerated death benefits may allow you to take a cash advance only if you become terminally ill or are diagnosed with a life-threatening illness.
Other policies will allow you to take a cash advance to pay for long-term care services if a health care professional determines that you are unable to perform the activities of daily living (such as bathing, dressing, and eating) without assistance. The policy terms may or may not require that you be admitted to a nursing home or similar facility before you can take the cash advance.
The maximum cash advance you can take is usually, but not always, a fixed percentage of your death benefit. The amount you can take may depend on its intended use. For example, the cash advance that you can take to pay for long-term care is typically limited to 1 or 2 percent of the death benefit.
If you are interested in a life insurance policy with accelerated death benefits that cover long-term care, you may be able to acquire the policy without submitting to the kind of thorough health screening that sometimes disqualifies applicants from long-term care insurance. While that is an advantage of accelerated death benefits, the disadvantages include:
- The cash advance available for long-term care is likely to be less substantial than the benefits available under a long-term care policy.
- You may not be able to use accelerated death benefits to pay for the kind of long-term care you want.
- Your eligibility for Medicaid may be affected if you receive a cash advance from your life insurance policy.
- Since cash advances are deducted from death benefits, your beneficiaries will receive less money after you die.
The conditions under which accelerated death benefits are available and the extra premium you must pay to add those benefits to a policy vary widely. You should compare the policies offered by different insurance companies before deciding on the coverage that is right for you.
Some insurance companies offer a product that combines life insurance with long-term care insurance. You can use the policy benefits to pay for long-term care if you need it. If you do not use benefits for that purpose, death benefits are paid to the policy’s beneficiary when you die.
Combination policies are relatively new. Different companies offer different products with varying terms and prices. Usually the benefits that are available for long-term care are limited to a percentage of the death benefit. You should shop around to compare benefits and prices if you are interested in a combination policy.
Cash Surrender Value
Assuming that you have “whole life” insurance rather than term insurance, your insurance policy has a cash surrender value. You can stop paying premiums on the policy and surrender it to the insurance company that issued it. The company will then pay you the policy’s surrender value.
A policy’s cash surrender value is usually a small percentage of the policy’s death benefit. While you can use that payment to help finance long-term care, you may be able to obtain more money through a life settlement.
A life settlement is the sale of your life insurance policy to a third party investor. Companies that specialize in life settlements are willing to pay more than the policy’s cash surrender value but less than the death benefit in exchange for ownership of the policy. You can use the cash you raise from a life settlement to pay for some or all of your long-term care.
The company that buys your policy pays future premiums and becomes entitled to collect the policy’s death benefit when you die. Since you no longer need to pay the policy premium, life settlements are often attractive to seniors who can no longer afford their premiums and to those who do not want to pay escalating premiums.
Some states regulate life settlements while others do not. States that regulate life settlements often prohibit the sale of a life insurance policy unless it has been in effect for a minimum number of years. One risk of making a life settlement is that you may not receive the fair value of your policy. If your state licenses life settlement brokers, you may want to use one to help you shop for the best offer.
Life settlements are not usually available to male policy holders before they reach the age of 70 or to females before the age of 74. Keep in mind that you may need to pay taxes on the life settlement you receive. Since that would reduce the amount you would be able to use for long-term care, you should talk to a tax adviser before you decide to pursue a life settlement.
A viatical settlement is essentially a life settlement that is available only to policy holders who are terminally ill. Viatical settlements are usually limited to policy holders who have a life expectancy of two years or less. Unlike a life settlement, the payment you receive is tax-free.
After you make a viatical settlement, the company that buys your insurance policy will pay your insurance premium. In return, it is entitled to collect the death benefit when you die. The beneficiary you previously designated to collect the death benefit will receive nothing.
Depending on your anticipated life expectancy, you will probably receive 50 to 80 percent of the death benefit as your compensation for making a viatical settlement. You can use that payment to meet the cost of your end-of-life care, such as the expense of a nursing home or hospice care.
Viatical settlements are not for everyone. Like life settlements, whether they are regulated depends upon the state in which you reside. You should talk to a financial planner about the risks and benefits of a viatical settlement before you elect that option to finance long-term care.