For many Americans, life insurance seems like an unjustifiable expense. Young, healthy individuals with limited assets, in particular, often view life insurance as something they can worry about later in life. Very few think about the need to provide for their families in the event of their untimely death. Yet, as we all know, unforeseen events happen all the time, and it’s wise to be prepared.
Life insurance can also provide another benefit -- it may pay some or all of the costs of long-term care. Although not available with all policies, many insurers are now offering long-term care coverage in tandem with their life insurance products.
Long-term care insurance is a type of insurance policy that covers costs associated with a prolonged illness or disability, such as Alzheimer’s disease, HIV/AIDS or a debilitating stroke. It is not health insurance “per se,” in that it does not cover healthcare costs such as medication, doctor’s visits or skilled nursing care. Instead, it pays for the kinds of expenses that are usually not covered (or covered in very limited amounts) by private health insurance or Medicare, such as home visits from licensed professionals and custodial care, either in a nursing home, assisted living facility or in the home. Some policies also cover home-modifications, such as wheelchair ramps.
The cost of long term insurance is based primarily on the individual’s age and state of health. Premiums are generally considerably lower if you purchase a policy while you are relatively young. Additionally, many insurers will not sell a long-term care policy to an applicant who is already in precarious health.
One drawback to purchasing long-term care insurance at any age is that the cost of the insurance is wasted if you remain in good health. Many consumers believe (correctly) that if they purchase this coverage at a young age they will pay a great deal of money for something they may never need. To address this issue, many insurers are now offering an insurance product that combines life insurance with a policy that covers long-term care costs.
The concept of combining life insurance and long-term care insurance is relatively new. Most policies include a set amount of life insurance, and long-term care benefits are calculated as a percentage of that amount. For example, a life insurance policy for $500,000 payable on your death might include long-term care benefit of 50 percent (the usual maximum) or $250,000.
If you use your long-term care benefit, the amount of your life-insurance decreases by that amount. However, if you never use it, your beneficiary receives the full payout of $500,000 when you die.
In addition to life insurance plus traditional long-term care insurance, other similar types of coverage are also available. These include accelerated death benefits, life settlements and viatical settlements.
Some life insurance policies include what’s termed an “accelerated death benefit” or ADB, which is designed to help you pay for your care should you suffer a catastrophic illness or injury. Some ADBs pay for long-term care over a period of time, while others allow you to take a cash advance against your existing life insurance in the event certain conditions exist. Depending on your policy, you may be covered in the event:
Generally, ADBs that cover long-term care cap the monthly benefit payable for nursing-home care at 2 percent of the amount of the life insurance policy. The amount paid for home care is usually 50 percent of that amount. Thus, if you have a $500,000 life-insurance policy, your monthly benefit for nursing-home care would be $10,000, and the maximum allowed for home care would be $5,000.
It is worth noting that the average cost of nursing home care in the United States is about $83,000 per year; home care is about $30,000 for six hours of care five days a week.
One advantage of purchasing an ADB policy versus traditional long-term care insurance is that ADBs are often available to individuals in less-than-perfect health. If you have a preexisting condition that would preclude you from purchasing life insurance with traditional long-term care coverage, an ADB might be a better fit.
This type of plan allows you to sell your life insurance policy to raise cash for any reason, including paying for long-term care. However, the benefit isn’t available until you are 70 (males) or 74 (females), and you may be taxed on the proceeds of the sale.
Similar to a life-settlement policy, a viatical settlement plan allows you to sell your life insurance policy to a third party, called a viatical company -- but only if you are terminally ill and have less than two years to live. The company pays between 50 and 80 percent of the policy’s death benefit based on your current life expectancy. (See chart below) It then owns the policy; pays the premiums, and is the beneficiary of the remainder of the policy when you die.
Unlike the proceeds of a life-settlement policy, the money received from a viatical settlement is not taxable. Viatical companies also do not buy every policy offered for sale and typically reject nearly half of all all applicants.
Viatical Payment Guidelines from the National Alliance of Insurance Commissioners
Even if you are a young person in excellent health, it’s important to plan for your future needs. None of us likes to think about what might happen if we became seriously ill or disabled, but the fact is that tragedies happen all the time. Why not be prepared? Our expert agents can help you sort out what coverage you need now and what you can put off until a later date. Just give us a call at 516-292-3780 to schedule an appointment, or request a free consultation online now.