While it is nice to imagine living independently for the rest of your life, chances are you will need long-term care at some point in your life. The U.S. Department of health and Human Services reports that you have a 70% likelihood of needing care. And you might already be aware that Medicare will not cover these costs. So, if you are thinking about long term care planning, one important step in creating your plan is to be aware of and understand what your funding options really are.
Today, long term care insurance comes in multiple flavors, each with different objectives and focuses for you to consider. For you to determine which insurance choice is best for you, it will be helpful to provide you with a brief overview of your options.
3 Types Of Long Term Care Insurance Policies To Consider
Long term care benefits today can be provided to you through 3 distinct types of insurance policies, each with a different emphasis and planning focus. You will want to be aware of each type to make the right decision for your needs.
The 3 forms of long term care insurance policies today are:
- Stand-alone traditional long term care insurance policy
- Hybrid long term care policy
- Life insurance policy with an LTC rider
What is a Stand-Alone Traditional Long Term Care Policy?
A traditional long term care insurance policy is a health insurance policy that will provide tax-free benefits to you should you need care. With traditional long term care insurance, you receive no death benefit if you do not need care. It is a "use-it-or lose it" policy. You can expect your monthly premiums to be the lowest with the traditional LTC policy, because there is not a death benefit attached. This policy may be right for you if your primary goal is to receive long term care coverage for yourself and you do not have a need or a want for a death benefit. One drawback with traditional long term care insurance is your premiums are not guaranteed, and could change. Traditional LTC policies are usually funded with monthly or annual premiums for life.
What Is A Hybrid Long Term Care Policy?
A hybrid long term care policy (also referred to as "asset-based" or "linked-benefit") is a policy that provides long term care benefits on an underlying life insurance or annuity chassis. Hybrid long term care policies will place your primary focus on maximizing your long term care benefits, while minimizing your life insurance coverage. With hybrid policies you will receive extended long term care benefits even after your life insurance benefit has been exhausted. However if long term care isn't needed, you will typically receive your entire premium paid back through your death benefit. Unlike traditional LTC insurance, your hybrid long term care policy premiums are guaranteed. You can think of a hybrid long term care policy as a Return of Premium LTC plan with guaranteed fixed costs. Hybrid long term care policies are often funded through a single premium or a payment schedule over 5 or 10 years. This policy will be your best choice if you want to maximize your long term care benefits but you aren't attracted to the lack of guarantees and the "use-it-or-lose it" nature of traditional LTC plans.
What Is A Life Insurance Policy With An LTC Rider?
A Life Insurance Policy with an LTC Rider is a permanent life insurance policy with a Rider attached to it that will allow you to have access to some or all of your death benefit should you need care. You will consider this option if you're mostly concerned with leaving a legacy or providing for your loved ones through permanent life insurance, but you would still like to have access to your policy's death benefit just in case if the need for care arises.
I suppose the life insurance policy with LTC Rider can also be lumped into the "hybrid" long term care arena, the hybrid concept referring to Life + LTC.
Thus we have 2 variations of Life + LTC policies.
The hybrid long term care policy referred to above will be long term care focused. It will include an Extension of LTC Benefit rider in addition to the Acceleration of Life Insurance Rider.
The life insurance policy with LTC Rider will only include the Acceleration Rider. You will not receive any long term care benefits provided to you after your life insurance benefit has been accelerated to you. You will not receive an Extension of LTC Benefits Rider.
The Life Insurance Policy with LTC Rider is life insurance focused.
You will be attracted to the Life Insurance Policy with LTC Rider if you view your long term care plan as an "oh by the way, what if I need care?"
You might be attracted to the Hybrid Long Term Care Policy referred to above if you view your long term care plan as "oh by the way, what if I don't need care?"
Your premiums with the Life Insurance Policy with LTC Rider can be funded for life, or for a scheduled number of years.
2 Easy Steps To Tailoring Your Life Insurance Policy with LTC Rider Coverage
Life insurance policies with LTC riders are extremely easy to be designed. Essentially, you have two choices to make:
1) How much life insurance do you want to buy?
2) What percentage of your life insurance benefit do you want to be provided to you on a monthly basis should you need care?
Generally you may select to receive 2%, 3% or 4% of your life insurance benefit when long term care is needed.
So for example: Let's say you want to buy a $500,000 life insurance policy to provide a legacy for your loved ones.
If you want to have liquidity available inside your life insurance policy to help you should you need long term care you can attach the LTC Rider.
1) a 2% Monthly Acceleration Percentage would provide you with $10,000 monthly LTC benefit for 50 months; ($500,000 x 2% = $10,000)
2) a 3% Monthly Acceleration Percentage would provide you with a $15,000 monthly LTC benefit for 33 months ($500,000 x 3% = $10,000)
3) a 4% Monthly Acceleration Percentage would provide you with a $20,000 monthly LTC benefit for 25 months ($500,000 x 4% = $20,000)
That's it. The choices are very simple.
How Long Will Long Term Care Benefits Be Paid with the LTC Rider
Your LTC Rider will generally accelerate long term care benefits through your life insurance policy for 2 years, 3 years or 4 years.
- 2% acceleration = LTC benefits for 50 months
- 3% acceleration = LTC benefits for 33 months
- 4% acceleration = LTC benefits for 25 months
You just need to decide if you want a higher monthly LTC benefit for a shorter period of time you would select the 4% monthly acceleration percentage.
If you want a lower monthly LTC benefit for a longer period of time, you would select the 2% monthly acceleration percentage.
Any unused LTC benefits will be paid out as a life insurance benefit.
Qualifying For Long Term Care Benefits with the LTC Rider
Qualifying for long term care benefits are the same for you with all policies that provide long term care benefits.
The benefit triggers are standardized and are set forth in Internal Revenue Code Section 7702.
You will be eligible to receive long term care benefits accelerated to you if your doctor certifies in writing that you are unable to perform 2 of 6 activities of daily living without substantial assistance from another individual and your need for assistance is expected to last at least 90 days. The 6 activities of daily living are eating, bathing, dressing, toileting, transferring and maintaining continence.
You will also be eligible to collect benefits if you are found to have a severe cognitive impairment that threatens your health or safety such as Alzheimer's or senile dementia.
What Are The Differences Between an Indemnity and a Reimbursement LTC Rider?
Qualifying for benefits will be the same with all long term care policies, however the policies will differ in how your benefits will be paid to you.
How Benefits Are Paid
There are two kinds of payments with long term care policies:
- Reimbursement policies
- Cash indemnity policies
Reimbursement policies will require you to submit bills and receipts to the insurance company every month. Your plan will only cover specific qualified long term care expenses as stated in your contracts. You will be reimbursed for the exact amount of qualified expenses you incurred up to your monthly maximum benefit amount. If you own a life insurance policy with an LTC Rider, any remaining unused LTC benefits will be paid out as your death benefit. Many insurance companies will allow direct billing and reimbursement with the care provider, however some facilities and care providers may not be willing to participate in 3rd party billing.
Cash indemnity policies will pay your entire monthly maximum LTC benefit to you without restrictions on how your benefits may be used. Thus, your entire monthly maximum benefit may be used to pay for care provided by family members or less expensive unlicensed caregivers. LTC benefits that are received that are not used for your individualized needs may be set aside for your later needs. At death, all remaining LTC benefits will be paid out as life insurance. Once your claim is approved with the cash indemnity model there is no monthly paperwork needed for you to fill out.
Can My Life Insurance Policy with LTC Rider Lapse Without Value?
With life insurance policies with LTC Riders you will need to be aware of your policies guarantees when you design your plan and select your premium funding amount and the number of years to pay your premium.
Most life insurance policies with LTC riders are based upon Universal Life.
Universal Life policies are flexible premium and adjustable in nature.
This flexibility with universal life will have positives and negatives for you.
The positives are you can generally have total flexibility with the amount of premium you want to pay every year, as well as you can decide how long you want to pay your premium
The negatives are you may not properly fund the plan, and if you underfund your policy you can outlive your coverage.
Your policy can lapse without any value for you at all.
So, you will need to be aware of the secondary guarantees that your policy will provide for you.
Most universal life insurance policies will provide you with a secondary no-lapse guarantee that will guarantee your death benefit for your entire lifetime.
Some universal life insurance policies will not allow you to include a lifetime no-lapse guarantee.
We only write policies with Lifetime guarantees for our clients, however many agents will sell universal life policies without lifetime guarantees (because they appear cheaper!)
If the purpose of your planning is for long term care or for legacy planning for your loved ones, you will want to have a fully guaranteed policy.
The average long term care claim is at age 87.
You will not want to live until age 85-90 and learn you will not have any long term care or life insurance benefits whatsoever because your agent sold you a policy that was not fully guaranteed not to lapse.
No. Unlike stand-alone long term care insurance premiums, and separately identifiable long term care insurance premiums within some hybrid long term care policies (OneAmerica Asset Care, Securian SecureCare, Nationwide CareMatters II), the long term care charges for the LTC Riders within life insurance contracts are not tax deductible.
While you will not receive any federal or state tax deductibility or tax credits, for tax purposes your long term care benefits and your life insurance benefit are intended to be excludable from federal gross income.
Even should your life insurance policy be classified as a modified endowment contract (MEC), the intent is for your long term care benefits to continue to be excludable from income taxes.
What Is a Chronic Illness Rider and How Does It Differ From an LTC Rider?
One of the biggest areas of confusion for consumers and advisors alike is the distinction between LTC Riders and Chronic Illness Riders attached to life insurance policies. You will need to be clearly aware of these differences with available riders if you are selecting or investigating a life insurance policy with an LTC Rider.
Many life insurance agents might insinuate that a Life Insurance policy with a Chronic Illness Rider is exactly the same as a Life Insurance policy with an LTC Rider.
Chronic Illness Riders are not the same as LTC Riders. So, how are these similar sounding riders different?
One of the main differentiators, at least in the past, is that Chronic Illness Riders required that when you submit your claim as the insured, your certification must state that your need for care will likely be for the rest of your life. Thus, for you to receive benefits with a Chronic Illness Rider, your need for care will be deemed unrecoverable.
In contract, LTC Riders will always pay temporary claims.
This distinction of temporary claims vs permanent claims has always been easy for advisors to understand, however today there have been revised standards for Chronic Illness Riders. Today, insurance companies are allowed to develop Chronic Illness Riders that have the option (but not the requirement) to pay temporary claims.
So today some policies with Chronic Illness Riders will pay temporary claims which unfortunately might blurry the lines with these Riders even more.
Some agents may now believe there is no difference if the temporary claim will be covered. However, this is not the case. There are still differences between LTC Riders and Chronic Illness Riders which you should be aware of, with the differences lying mostly with your protection as a consumer.
LTC Riders on life insurance policies have mandatory built-in features that are required to be included with all "long term care" policies to protect you as a consumer. many of these built-in consumer protection features revolve around protecting you from an unintentional lapse of your policy due to cognitive or physical incapacitation.
Lapse protection features are not required to be included with Chronic Illness Riders.
The importance of lapse protection features in your policy can not be understated.
Cognitive impairments such as Alzheimer's or dementia is the #1 cause of long term care claims. 33% of seniors will die while having Alzheimer's or dementia. Deaths from Alzheimer's has increased by 120% since 2000.
All long term care policies and life insurance policies with LTC Riders are required to include consumer protections against an unintentional lapse of coverage. All LTC policies require for the insurance company to set up a named 3rd party designated to receive written notices if your premiums are unpaid and due. If your policy is within 30 days of lapse the insurance company is required to send written notice to your designee (children, siblings, attorney, friend) so that you can be reminded to pay your premium. With the risk of Alzheimer's and dementia as we grow older there is a greater risk we might forget to pay our premium and lapse our coverage. Lapse protection features are required to protect you form this occurrence. With LTC policies and LTC Riders, the insurance company is required to offer you this protection and update your designee every two years.
Lapse Protection While On Claim
LTC Riders also require that your LTC benefits can not lapse while you are on claim, even your cash values go to zero. The insurance company must continue to pay your LTC benefits to you. If there isn't enough cash value to cover the internal monthly costs associated with the policy, the monthly costs will be waived. Chronic illness policies do not have this feature, and many chronic illness policies will not waive premiums when the insured is on a chronic illness claim.
Extension of Benefits For Lapsed Policies
All LTC Riders are required to have the protection for you to allow for your LTC benefits to still be paid on your lapsed policy if you can prove you would have qualified for LTC benefits prior to lapsing your policy. Thus, if you can show that you had Alzheimer's for example, and due to being cognitively impaired you failed to pay your premium, your LTC Rider benefits will be reinstated.
Chronic Illness Riders are not required to have this benefit. Thus, if you lapse your life insurance policy with a chronic illness rider, you will not be able to go back and recapture benefits.
In additional to these consumer protection features included with LTC Riders, another distinction with chronic illness riders is your determination of benefit.
Many chronic illness riders can be added upfront to your life insurance policy without cost to you and without additional underwriting.
Your cost for your chronic illness rider will be paid when you initiate your chronic illness claim
You will pay for your rider by either forfeiting a portion of your death benefit or having your death benefit subject to a lien with interest paid by you.
In either scenario the amount of your death benefit you receive will be less than your face amount and it will not be able to be determined prior to your chronic illness claim.
You should try to ensure your policy has a long term care rider and not a chronic illness rider.
What Does a Life Insurance Policy with an LTC Rider Cost?
Life insurance rates will be based upon your age and your health status when you buy your policy. To help you to gain a sense of the premiums let's look at a few examples for both men and women with a few different ages.
Let's look at rates for age 45 and age 60.
To keep things simple let's review rates for a $250,000 life insurance policy with LTC riders.
One of my favorite policies for life insurance benefits with LTC Riders is the Nationwide UL Protector policy.
Nationwide will provide you with 100% flexibility through cash indemnity LTC benefits with this universal life insurance policy.
Nationwide will also provide you with a Lifetime no lapse guarantee to age 120 on your LTC benefits and life insurance benefits.
This is an excellent policy for us to review premiums with because it so flexible with cash indemnity LTC benefits and it is fully guaranteed to never lapse as long as you live.
Might you be able to design your plan for less premium with a life insurance guarantee only to age 80 or age 85, sure.
Would you want to do this? I would never entertain a policy that did not provide me with a Lifetime no-lapse guaranteed death benefit.
If you are concerned about long term care planning or life insurance planning let's begin with reviewing premiums for fully guaranteed LTC and life insurance benefits.
To keep things simple let's review rates for a $250,000 life insurance policy with LTC riders of 2% month, 3% month and 4% month.
We can review rates with each LTC acceleration percentage of 2% month, 3% month, and 4% month so you can see how the premiums change for you when receiving different LTC monthly benefit amounts.
The following rates are for non-smoker applicants in good health.
You can see that your premiums become slightly higher with requesting the higher monthly LTC benefit acceleration percentages of 3% or 4% per month.
$250,000 death benefit, 2% LTC acceleration percentage, $5000 monthly LTC benefit for 50 months
Female age 45: $220 month or $2498 annual
Male age 45: $245 month or $2774 annual
Female age 60: $425 month or $4825 annual
Male age 60: $467 month or $5280 annual
$250,000 death benefit, 3% LTC acceleration percentage, $7500 monthly LTC benefit for 33 months
Female age 45: $242 month or $2760 annual
Male age 45: $263 month or $2994 annual
Female age 60 or $457 month or $5207 annual
Male age 60 or $494 month or $5600 annual
$250,000 death benefit, 4% LTC acceleration percentage, $10,000 monthly LTC benefit for 25 months
Female age 45: $259 month or $2962 annual
Male age 45: $275 month or $3133 annual
Female age 60 or $482 month or $5509 annual
Male age 60 or $512 month or $5811 annual
Here are the sample illustrations.
Should I Buy a Life Insurance Policy With An LTC Rider?
You should consider a life insurance policy with an LTC Rider if it is important for you to protect assets and leave a legacy for your loved ones through life insurance. Adding the LTC Rider to your life insurance policy does add an additional cost (usually 10% - 15% depending upon the monthly LTC acceleration percentage you elect), however if it is important to you to have access to your life insurance benefit while you are still alive to not have to burden family with added long term care costs, it may be worthwhile to add the LTC Rider to your life insurance policy for this small additional cost.
Alternatively, if your main concern is not with leaving life insurance to your heirs, but with maximizing your long term care benefits for your needs, you might want to consider a hybrid long term care policy that will minimize your life insurance even further and maximize your LTC benefits for a minimum benefit period of 6 years or even a policy with Lifetime Unlimited coverage.
With long term care planning you will have many options to consider depending upon what your primary concerns are.
I will be pleased to help guide you through all of your options to help you to find the right long term care policy for you.
Please call me at (800) 891-5824 with any questions or to receive customized illustrations. or you may request your information through my online request form.
Thank you for reading my blog.