Life insurance has many uses, including income replacement, business continuation, and estate preservation. Long-term care insurance helps provide financial protection against the potentially high cost of long-term care. If you find yourself in need of both types of insurance, a life insurance policy that combines a death benefit with a long-term care rider may appeal to you.
Here’s how life insurance with a long-term care rider works
Some life insurance issuers offer life insurance with a long-term care rider available for an additional charge and is subject to contractual terms, conditions, and limitations as outlined in the policy and may not benefit all people. If you buy this type of policy, you can pay the premium in a single lump sum or by making periodic payments. In any case, the policy provides you with a death benefit that you can also use to pay for long-term care expenses, should you incur them.
The amount of death benefit and long-term care allowance is based on your age, gender, and health at the time you buy the policy. The appeal of this combination policy lies in the fact that either you’ll use the policy to pay for long-term care expenses or your beneficiaries will receive the insurance proceeds at your death. In either case, someone will benefit from the premiums you pay.
Long-term care riders
The long-term care benefit is added to the life insurance policy by either an accelerated benefits rider or an extension of benefits rider.
Accelerated benefits rider
An accelerated benefits rider allows you to access your life insurance death benefit to cover long-term care expenses. The insurer reduces your death benefit by the amount you use for care, plus a service charge. If you need long-term care for an extended period, the death benefit may eventually be depleted.
This rider can also help if you have a terminal illness and face large medical bills. Because using the death benefit early can have tax consequences, consult a tax professional before exercising this option.
Example of Accelerated Benefits
Suppose you pay a single premium of $50,000 for a universal life insurance policy with a long-term care accelerated benefits rider. The policy immediately provides approximately $87,000 in benefits, either as a death benefit or for long-term care.
If you incur long-term care expenses, the rider lets you access a portion of the death benefit each month. For example, you could use 3% ($2,610) of the $87,000 death benefit per month to cover care. Long-term care payments continue until the full $87,000 is exhausted, which is about 33.3 months. Any unused portion of the death benefit passes to your heirs.
Note: This hypothetical example is for illustration only and does not reflect actual insurance products or performance. Guarantees depend on the claims-paying ability and financial strength of the issuer.
Extension of benefits rider
An extension of benefits rider increases your long-term care coverage beyond your death benefit. This rider differs from company to company as to its specific application.
Depending on the issuer, the extension of benefits rider either increases the total amount available for long-term care (the death benefit remains the same) or extends the number of months over which long-term care benefits can be paid. In either case, long-term care payments will reduce the available death benefit of the policy. However, some companies still pay a minimum death benefit even if the total of all long-term care payments exceeds the policy’s death benefit amount.
Continuing from the previous example, if the policy’s extension of benefits rider increases the long-term care benefit (the death benefit—$87,000—remains the same) to three times the death benefit ($261,000), the monthly amount available for long-term care increases to $7,830. On the other hand, if the extension of benefits rider extends the length of time the monthly long-term care benefit is available, then the monthly payments ($2,610) are extended for an additional 24 to 36 months beyond the initial number of months (33.3) available.
Other provisions
Typically, qualifying for payments under a long-term care rider is similar to the requirements for most stand-alone long-term care policies. You must be unable to perform some of the activities of daily living (bathing, dressing, eating, getting in or out of a bed or chair, toilet use, or maintaining continence) or suffer from a severe cognitive impairment.
An elimination period may also apply: You pay for the initial cost of long-term care out-of-pocket for a specific number of days (usually 30 to 90) before you can apply for payments under the policy. As with all life and long-term care insurance, the insurance company will require you to answer some health-related questions and submit to a physical examination before issuing a combination policy to you.
Is a combination policy right for you?
Deciding whether a combination policy fits your needs depends on several factors. Ask yourself: Do you need both life insurance and long-term care insurance? How much coverage will you need for each? How long will you need it? Will the long-term care portion provide sufficient benefits?
Limitations of Long-Term Care Riders
A long-term care rider may not offer all the features of a stand-alone policy. For instance, it may not cover assisted living or home health aides. It may also lack inflation protection, which is important given rising long-term care costs.
Additionally, tax advantages that apply to qualified long-term care policies may not extend to the rider portion of a combination policy. As a result, benefits received from the long-term care portion could be taxable.
Life Insurance Considerations
Your life insurance needs may change as you age. Many people drop life insurance later in life if it’s no longer necessary. If you surrender a combination policy, you also lose the long-term care benefits—often when you are most likely to need them.
Keep in mind that using long-term care benefits reduces your death benefit. This is the death benefit you may have intended to leave to your heirs or to pay estate taxes.
Comparing Costs
Finally, compare the cost of a combination policy to separate life insurance and stand-alone long-term care policies. Depending on your age and health, a combination policy may cost more than buying the two policies separately. This is especially true if your life insurance need is temporary, such as income replacement during working years, rather than permanent coverage.
FAQs:
1. What is a combination life insurance and long-term care policy?
It’s a life insurance policy that includes a long-term care rider. This rider allows you to use part of your death benefit to pay for long-term care expenses if you need it. If you don’t use the LTC benefit, your beneficiaries receive the full death benefit when you pass away.
2. How does an accelerated benefits rider work?
An accelerated benefits rider lets you access a portion of your life insurance death benefit for long-term care or terminal illness. Each withdrawal reduces your death benefit and may include a service charge.
Example:
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Death benefit: $87,000
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LTC monthly benefit: 3% ($2,610)
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Coverage duration: ~33 months
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Any unused death benefit goes to your heirs.
3. What is an extension of benefits rider?
An extension of benefits rider increases your long-term care coverage beyond the death benefit in one of two ways:
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Higher total LTC benefits – total LTC coverage may be a multiple of the death benefit.
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Longer coverage period – monthly LTC benefits continue for additional months beyond the original limit.
4. Who qualifies for long-term care benefits?
Typically, you qualify if you:
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Cannot perform some activities of daily living (ADLs) like bathing, dressing, eating, transferring, toileting, or continence, or
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Have a severe cognitive impairment.
Some policies also require an elimination period—you pay for care out-of-pocket for a set number of days (usually 30–90) before benefits begin.
5. Are there limitations to LTC riders?
Yes. Limitations may include:
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No coverage for assisted living, home health aides, or certain services.
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No inflation protection, which could make benefits insufficient over time.
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Potential taxation of benefits, since tax advantages of qualified stand-alone LTC policies may not fully apply.
6. How does using the LTC benefit affect the death benefit?
Any long-term care payments reduce your death benefit. This could reduce the amount left to heirs or available for estate taxes.
7. Is a combination policy right for me?
Ask yourself:
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Do I need both life insurance and long-term care coverage?
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How much coverage do I need for each?
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How long will I likely need LTC benefits?
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Will the rider provide sufficient benefits if I need long-term care?
8. How does the cost compare to separate policies?
Combination policies may cost more than buying separate life insurance and stand-alone LTC policies, especially if you only need temporary life insurance for income replacement. Costs depend on age, health, and coverage amounts.
9. Can I surrender a combination policy?
Yes, but surrendering ends both life insurance and LTC coverage. This could leave you without LTC benefits when you need them most.
10. Should I consult a financial advisor?
Absolutely. A financial advisor can help you weigh costs, coverage amounts, tax implications, and whether a combination policy fits your retirement, estate, and long-term care planning goals.
