One of the most important ways to take control of your financial future is to create a plan for what happens as you age. It's gotten incredibly expensive to pay for what we call "long-term care," the kind of care you may require after an injury, illness, surgery, or simply due to the effects of aging. But there’s one simple solution many people overlook: using life insurance and long term care riders.
This solution combines a life insurance policy with living benefits you can use when it's time to pay for care. Those living benefits come in the form of riders, or policy add-ons. When you buy your policy and select an LTC rider, you get to choose the percentage of the death benefit you want available to help pay for any costs of care you might have.
Here’s how that one product solves multiple problems for you:
- Life insurance provides a death benefit for your loved ones. If something happens to you and you pass away sooner than expected, your loved ones get the cash they need to replace your income, pay rent or mortgage, and put food on the table.
- Life insurance usually provides a terminal illness rider. Most insurers offer this at no cost, which lets you access a portion of the death benefit if you are diagnosed with a terminal illness. This money can cover the costs of treatment, prescriptions, home modifications, or create a lasting memory with a family trip.
- A long term care benefit rider helps you pay for care if you need it. This rider costs extra, but it can be a big help later in life. It lets you use a healthy percentage (often up to 80%) of the death benefit if you need help with the activities of daily living (ADL) such as eating, bathing, and dressing.
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What Does a Long Term Care Rider Cover?
Let’s say you buy a permanent life insurance policy and want to pay extra for a long term care rider. Insurance companies charge based on how much of the death benefit you want access to, as well as individual factors like your age, sex, and health. There’s no single flat fee for this rider, so we need to know a few facts about you first to give you an accurate quote.
But what happens later, if you need to make a claim?
There are usually two conditions you need to meet to make a claim for LTC benefits from your insurer:
- You must be diagnosed with one or more qualifying health conditions. Commonly covered conditions include dementia, Alzheimer’s, cancer, heart disease, multiple sclerosis, arthritis, Parkinson’s, and epilepsy. This list isn’t all-inclusive. The full list of covered conditions will be provided by your insurer when you buy a policy.
- You must need help with two or more activities of daily living (ADLs). There are six total ADLs, including eating, bathing, toileting, continence, dressing, and transferring from bed or a chair without assistance.
Your insurer will need to see your medical file to verify you really do need this care. You’ll also need to sit tight through the elimination period, usually 30, 60, or 90 days. Once your claim is approved, that money is paid out to you income-tax-free to help with nursing home expenses, assisted living expenses, or an in-home health aide.
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How Does a Long Term Care Rider Pay Out?
When you buy your long term care rider, some insurers ask you to choose whether you want to take monthly payments or one lump-sum payment. With the lump-sum payment, you manage the money for the duration of your care and pay it out to your care provider. This is usually the more expensive option.
One great potential benefit of the lump sum option? Many insurers don’t have any restrictions on how you use that money. For example, if you want to pay a stipend to a child or grandchild who helps take care of you, you can do that. It all depends on your insurer, so if this is important to you, make sure you tell your agent when you’re shopping for policies. That’s why the best long term care rider is different for everyone – it all depends on what you want to be able to do.
The other option is to receive monthly payments, usually made as reimbursements for approved expenses. That means you (or a loved one) need to keep careful records, including receipts. This is almost always the more affordable option, but it does create another task you’ll have to handle.
If you don't use all of the money earmarked for long-term care, the remainder goes to your beneficiaries. Even if you use all the money to pay for care, many insurers offer a guaranteed death benefit that will still pay out 10% of the policy's face value.
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A Long Term Care Rider Saves You Money
Your options for paying for long term care include self-insuring (using your savings), a long term care insurance policy, or using the strategy we’re talking about here, a life insurance policy with long term care rider. The life policy with LTC rider can save you the most money in the long run:
- Your payments are less likely to go up. It's possible that, if you bought a separate long-term care insurance policy, your monthly payments could increase significantly. It's probably happened to you with your health insurance policy — well, stand-alone LTC insurance isn't much different. We see yearly increases all the time from carriers like Genworth. But when you buy your life insurance policy, your rate is locked in. The cost of that coverage won’t change. Ask your agent beforehand if the cost of the rider itself is subject to change.
- Your money never goes to waste. What if you don't need your long-term care benefits? If you pay for a stand-alone policy and don't use it, nothing comes of your investment. But with life insurance and an LTC rider, nothing goes to waste. Instead of paying long term care insurance premiums PLUS life insurance premiums, you make one easy payment. If you need care, the policy pays you. If you don't need care, the policy pays your beneficiaries. You never have to worry about paying an insurance company and getting nothing in return.
Life insurance with a long-term care rider keeps you in control of your life.
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What If You Use Up All the Money for Long Term Care?
Depleting the death benefit is the biggest financial risk of this strategy. It ensures you’re taken care of, but it may leave your loved ones high and dry if they need that death benefit once you’re gone. If this is the case, there’s an easy strategy to compensate:
- Buy one permanent life insurance policy with a long term care rider. Very few insurers offer term life policies with LTC riders – they’re more commonly found on lifelong permanent policies. So buy this policy for at least the amount you may need for future care. If you need care, the money is there for you. If you don’t, you’re covered for the rest of your life and the death benefit will go to your loved ones.
- Buy a supplementary term life policy without a long term care rider. This is where you add on an inexpensive term life policy that’s guaranteed to go to your loved ones when you pass away. If you need to use up the permanent policy for your own care, there’s still one death benefit available for your loved ones.
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