But life insurance policies often offer ancillary benefits that can be worth the additional cost. One of these options includes paying for the long-term care you might need before you die. Depending on the situation and your budget, obtaining long-term care insurance through a life insurance policy can be an excellent financial decision.
The Costs of Long-Term Care
The U.S. Department of Health and Human Services estimates that seven out of 10 people turning 65 today will need some form of long-term care in their lifetime. And depending on the type of care you need, the costs can add up fast. The costs of different kinds of care can also vary widely, according to Genworth Financial’s 2020 Cost of Care Survey:
How to Use Your Life Insurance for Long-Term Care
The primary purpose of life insurance is to provide a death benefit if the insured passes away during the policy’s term. However, with the right strategy, you can also add other benefits to your life insurance, including options for long-term care if you need it. Here are some potential paths to consider.
Convert Your Policy
Some term life insurance policies allow you to convert some or all of the policy’s death benefit to a permanent life insurance policy, such as whole life or universal life. Unlike term policies, permanent policies have a cash-value component. As you pay your premiums, a portion of that money goes toward the cash value, which grows over time. At any time, you can surrender your policy and receive the cash value balance. The biggest downside to this option is that it can take several years for a new permanent life insurance policy to accumulate enough cash value to make this option worthwhile. If you think you’ll choose this path, you’ll need to plan well in advance. Also, because permanent policies tend to cost far more than term policies, this strategy may not be affordable for many people. Finally, the cash value you receive when you surrender your policy may be taxed, leaving you with a smaller payout than you expected.
Sell Your Policy
A viatical settlement allows another person to purchase some or all of your policy at a price that’s lower than the death benefit; it can be as high as 80% of that benefit. You may qualify to sell your policy with a viatical settlement if you have a chronic or terminal illness. The cash you receive from the sale is generally not taxable, and you can use it to cover your long-term care needs. As with the other options, there are some drawbacks. For starters, broker fees and commissions can eat up as much as 30% of your payout. Also, instead of your original beneficiary, the investor will receive the death benefit when you die, which could create financial problems if your loved ones were depending on those funds.
Add a Long-Term Care Rider
Depending on your insurer, you may be able to add a long-term care rider to your existing life insurance policy, or you can purchase a new one that allows it as an add-on feature. The cost of a long-term care rider can vary depending on the insurance company and your situation. The rider allows you to tap some of your death benefits to pay for long-term care costs while you’re still living. That said, you may be limited to receiving a small percentage of your death benefit per month, and there may also be a maximum benefit.
Purchase a Hybrid Policy
A hybrid life and long-term care insurance policy gives you the benefits of both coverages. One of the reasons to consider a hybrid policy over two standalone policies—one for each type of coverage—is that the premiums may be fixed instead of subject to increases over time. Additionally, the medical underwriting isn’t as stringent for a hybrid policy as a long-term care policy, so it may be easier to get. But remember, the death benefit on the life insurance side is reduced when you use the policy to cover long-term care.
Other Ways to Pay for Long-Term Care
Before you purchase a long-term care policy or use your life insurance policy to help pay for those expenses, it’s important to consider all of your options to pay for care. Other alternatives include:
Savings: If you’ve built a robust nest egg for your retirement, you may be able to simply use your personal cash reserves to pay for your care. Government programs: There’s a long list of government programs that can help you pay for long-term care. Options include Medicare, Medicaid, Program of All-Inclusive Care for the Elderly (PACE), State Health Insurance Assistance Program (SHIP), and Social Security Disability Income. If you’re a member of the military community, you may also be able to request assistance from the Department of Veterans Affairs. Other options: In addition to a standalone long-term care insurance policy, you may also consider a reverse mortgage, an annuity, or a trust.
With so many options on the table, consider speaking with a financial advisor before you decide which path is best for you.
Should I Use Life Insurance to Pay for Long-Term Care?
Make sure you understand the costs and the limits of converting your term policy to a permanent one, adding a long-term care rider, or buying a hybrid policy. While it can be more convenient and possibly even cheaper to pay for long-term care with your life insurance policy, the benefits may not stack up well against a traditional long-term care policy. If you’re chronically or terminally ill, a viatical settlement can potentially get you a lot of cash right now, but it could leave your loved ones high and dry after you’re gone. How to fund long-term care is a significant financial decision, so it’s crucial you consider each option carefully—both with life insurance and without it—before you make a decision.
