Long-term care riders are a feature of some life insurance policies that allow you to access life insurance benefits while still alive to help pay for the cost of long-term care needs.
According to the US Department of Health and Human Services, nearly 70% of Americans turning 65 today will need long-term care at some point.
To make matters worse, the majority of Americans “underestimate the risk of developing a disability and needing long-term services and supports.”
With the odds high that you’ll require long-term care, it is important to understand the costs and how a long-term care rider can help you pay for them.
What is a Long-Term Care Rider?
A long-term care rider is a life insurance policy feature that allows you to get part of the death benefit from life insurance for long-term care (LTC) needs while still alive.
A form of accelerated death benefit (ADB), long-term care riders may offer you an opportunity to avoid financial strain from care needs.
The typical long-term care user includes up to 2 years of care at home and one year in a nursing or assisted living facility. In to put it simply, long-term care is expensive. Average costs range from $20 an hour for a home care aid up to $7,698 per month for a private room in a nursing home.
The long-term care rider, if your life insurance includes this valuable feature, may offer several choices for using a portion up to the entire death benefit to help pay for long-term care. If you don’t have long-term care insurance or a long-term care rider, you may be able to sell your term life insurance or go through a life insurance settlement as an alternative to get cash today from your policy.
The Purpose of Long-Term Care Riders
The long-term care rider policy add-on allows qualifying life insurance policy owners to tap into their life insurance death benefit while they are still living. To qualify, policyholders must meet a medical need for long-term care.
Long-term care is different from medical care, an important distinction.
The definition of long-term care varies from policy to policy. Some accelerated death benefit riders give the policyholder access to funds only when diagnosed with a terminal illness. Others may offer a bit more flexibility, but would still require some level of chronic illness to trigger the rider’s benefits.
If you already have long-term care insurance, the costs of long-term care may already be covered. Long-term care policies often offer a certain monthly benefit for a number of months. Check with your insurance company to see what benefits are available if you already have long-term care insurance. If not, or if you have exhausted your long-term care insurance benefits, the long-term care rider is even more valuable.
Who May Benefit From a Long-Term Care Rider?
If you have life insurance, check with your life insurance company to find out if you have a long-term care rider, or a similar option called a chronic care rider. Both types of riders can offer either a monthly benefit or lump sum benefit that can help pay for care needs.
Qualified long-term care providers charge a range of fees depending on the type, location, and level of care. To get access to the LTC coverage from a rider, you may need to demonstrate severe cognitive impairment or demonstrate that you need daily assistance with a specific list of activities of daily living (ADLs). Most commonly, a doctor will have to certify that you need help with at least two activities of daily living to get funds through a long-term care insurance rider.
Common ADLs include feeding, bathing, dressing, grooming, working, housework and cleaning, and toileting.
If you can’t handle basic hygiene, cooking, laundry, and personal care needs on a daily basis, you likely qualify for long-term care if you have traditional long-term care insurance or a long-term care rider with life insurance.
What to Consider With Long-Term Care Riders
Before tapping into the funds provided by your life insurance, consider what would happen if your loved ones lose that future payout. Also, consider other options to help pay for long-term care outside of your accelerated death benefit rider.
If you can pay for long-term care expenses from savings and other insurance, that is the best place to start. If you don’t have traditional long-term care insurance, you may still qualify for benefits through a health insurance provider, Medicare, or Medicaid. Any of these sources leaves your life insurance intact for your loved ones. When you exercise a long-term care rider, it will lower the death benefit in the future, if not completely eliminate it.
The funds from your rider may be a key to a spouse or child keeping full-time employment rather than going part-time to care for you. It may be a path to a higher quality of living. No one should have to give up their dignity because of the cost of long-term care, but it sadly happens every day.
If you have a long-term care rider that can improve your life and the lifestyle of your loved ones, the benefits may be lifesaving.
Financial Implications of a Long-Term Care Rider
Depending on your life insurance policy, your long-term care rider may work in a number of ways. Whether you have term life insurance or permanent life insurance, sometimes called whole life insurance, there are some similarities and differences between how the riders work.
With term life insurance, using a long-term care rider will simply lower the future death benefit from the insurance policy. Some policies may allow a dollar-for-dollar benefit, where each $1 you take from the policy lowers the death benefit by $1 in the future. In other policies, you may have to give up a portion of the future death benefit to take a lump sum payout today. For example, for every $1 you take today, your future benefit goes down by $1.50 or $2.00.
Because permanent life insurance policies contain a cash value that grows over time with contributions, you may have to split the investment cash value from the death benefit. This is called a life insurance policy conversion. Then, you can take the long-term care rider benefits from the future death benefit of the new life insurance portion of the split insurance products.
Most lump-sum payments won’t have any tax benefits, but it is possible that you would have to pay taxes when using a long-term care rider to pay for long-term care costs. If in doubt, consult with a trusted tax expert or attorney that can guide you through the implications to your own personal finances.
How Long-Term Care Rider Benefit Payouts Work
A long-term care rider will offer payments in one of two methods.
First, and easiest for the insured, is a lump payment. This is considered an indemnity benefit, as once you get the check you can use the funds however you want. You can spend them on other medical costs or living costs if you want, but know that you won’t get it replaced if you don’t actually use it for long-term care needs.
The second option, which is much more work, is a monthly payment or reimbursement. Because the lump payment happens all at once, it tends to be much simpler. With a reimbursement, you’ll have to keep good records of long-term care costs (which you should do anyway) and submit them to the insurance company for payment.
In either case, there are three primary methods to get paid when it comes to the future cash value of a death benefit payout:
- Discounted death benefit method
- Lien method
- Dollar-for-dollar acceleration method
With the discounted death benefit method, each dollar you take in benefits today has a disproportionate discount on benefits in the future. If you have a $500,000 policy, for example, taking $100,000 in accelerated benefits may lower your death benefit by $200,000. That means you are, in effect, paying $100,000 extra from a future benefit to get $100,000 today. The severity of the discount typically correlates to the insured’s health condition and policy terms.
The lien method borrows from the future payout of a policy with what is effectively a loan today. While the “loan” against the policy does not discount the future death benefit, you will need to use the death benefit to pay off the loan, plus interest. This means there is more than a $1 cost from your future insurance for each $1 you take today.
The dollar-for-dollar acceleration method is the best if you can get it. With this method, each dollar you take today discounts your future payout by the same amount. Take $100,000, and your policy death benefit goes down by $100,000. There is no extra cost, which is why this method is preferred.
What About Traditional Long-Term Care Insurance?
The long-term care benefits from a regular long-term care insurance policy still offer the best dollar-for-dollar benefit per the cost of any insurance option for long-term care needs.
However, getting long-term care insurance is expensive and can be a challenge.
While they used to be relatively easy to buy, insurers found the costs of offering stand-alone long-term care insurance to be quite high. This is why many are stuck with an LTC rider for their long-term care services costs.
In some cases, the benefit amount from a long-term care insurance policy isn’t enough to cover your care needs. In that case, you may want to use a long-term care rider in addition to the dedicated long-term care benefits from the stand-alone long-term care policy.
If You Don’t Have a Rider, You Still Have Options To Cash in Your Life Insurance
If you don’t have an LTC rider and still need to pay for long-term care services beyond what you can afford, there are still options to leverage your life insurance for a lump payment today.
If you’ve been paying for life insurance for years, or even decades, you have built up a valuable asset that can turn into immediate cash if you struggle with long-term care costs. Even if costs are for regular medical care, when you sell your life insurance or go through a life insurance settlement, you can use the funds however you choose.
A Long-Term Care Rider Can Provide a Path to Comfort in Difficult Times
No one wants to become dependent on others for basic living needs. But the need for long-term care is very common. Even though the financial burden can be significant, long-term care can help keep yourself or a loved one struggling with illness stay comfortable and keep their dignity during one of the biggest challenges of their lives.
In an ideal world, this type of care would be freely available to anyone who needs it. But the reality is that long-term care is expensive. Even if you don’t have traditional long-term care insurance, however, life insurance can be a path to comfort in challenging times.
A long-term care rider, chronic illness rider, or selling your life insurance can help cover the costs of long-term care without putting an extreme time or financial burden on your family. That, after all, is what life insurance is all about.