The Benefits of Long-Term Care/Life Insurance Combination Policies
In the coming years, a growing number of Americans will require long-term care. With an aging population and ever-increasing life expectancies, individuals can expect to live longer; meaning at some point, many will need a caregiver either in their home, assisted living center, or nursing home.
Though the need is greater, individuals have been hesitant to purchase traditional stand-alone long-term care insurance in the past. The main reason is they do not want to spend a significant amount of money on a policy they may never use. This has given rise to combination long-term care/life insurance policies, which cover the individual for ongoing care needs while alive, then return the unused portion of the policy in the form of a death benefit when they pass on.
Why Do Individuals Need Long-Term Care Coverage?
Many people believe the government will automatically cover their long-term care needs when they retire. Though the government does pay for long-term care in some circumstances, it would be a big mistake to count on that. The two programs an individual may qualify for to pay for this type of care are Medicaid and Medicare. Medicaid provides more extensive long-term care coverage than Medicare, but there are strict income/asset requirements that must be met to qualify. If you are unable to qualify for Medicaid and require long-term care, it could become a major financial burden for you and your family. This is when having long-term care coverage can pay off.
The Advantages of a Long-Term Care/Life Insurance Combo Policy
These days, there are fewer and fewer standalone long-term care policies, most are tied together somehow with life insurance. There many variations of the long-term care/life insurance combo policy. Here are a couple common examples:
- Traditional Long-Term Care with Rider: The traditional long-term care policy is a “pay as you go” model; meaning premiums are paid on a continual basis (usually annually) for as long as the policy is in force. In recent years, the traditional model has been modified by many insurers to include a “return of premium” rider. This means that if the insured has paid more in premiums than he/she has used in LTC benefits, the excess amount is paid out to a designated beneficiary, similarly to what would happen with a life insurance policy.
- Hybrid LTC/Life Insurance Policies: Hybrid, or sometimes known as “blended” policies are usually life insurance policies with a long-term care rider. With these types of policies, long-term care benefits can be paid out against the death benefit until it is exhausted. Example: if you have a $250,000 life insurance policy, $250,000 is the maximum the insured can receive in LTC benefits. Many hybrid policies require a large one-time premium payment, rather than paying premiums annually.
Clearly, the major reason combination LTC/life insurance policies are quickly replacing traditional standalone products is the assurance that, one way or another, a benefit will be paid. If long-term care is required, the insured is covered for that. If the insured never uses long-term care, the premiums are returned or a death benefit is paid out to a beneficiary.
Another reason combo policies are gaining popularity is the tax advantages. Many of these policies are tax-qualified. This means that premiums paid in may be tax-deductible, and premiums paid out are non-taxable. Each policy is different and tax qualifications vary, so always check with your CPA or tax professional regarding your specific circumstances.
Most individuals know they may need long-term care during their golden years, but they have often avoided traditional LTC insurance in the past. By combining long-term care with life insurance, the insured is able to purchase two essential protections in one, with the assurance that the money paid out in premiums will not be thrown away. This makes it a great product to purchase as an individual, or as an executive benefit for high-level employees.