When it comes to long-term care insurance, retirees might be able to have their cake and eat it, too, — at least a piece.
Or, perhaps I should say, they can have their cake and their heirs can eat it, too.
That’s because it’s possible to use your life insurance to pay for much the same sort of expenses otherwise covered by long-term care insurance. And very possibly for lower premiums.
I should stress from the outset, financing long-term care is an incredibly complex topic. You definitely should work with a qualified retirement financing specialist in discussing which solution would be most appropriate for your situation.
But if your specialist hasn’t already raised the possibility of using life insurance to pay for long-term care, I definitely suggest you raise it yourself.
First, a bit of background. While not everyone will need the services of an assisted living facility, home health care, or other expense covered by long-term care insurance, a not insignificant percentage of us will incur a huge amount of such costs. The attached chart paints the picture. According to Federal government estimates, as quoted in a recent white paper from Vanguard, 15% of those reaching 65 in the next year or two will eventually incur long-term care costs of more than $250,000. An additional 21% will incur costs in excess of $50,000.
At the same time, however, nearly half of us will not incur any long-term care costs.
This is just the kind of risk profile that insurance is designed to cover, of course. A not dissimilar chart, for example, could be constructed from the costs and probabilities of any of our individual houses burning down. That’s why insurance premiums can be low and payouts large for the few who really need it.
Nevertheless, long-term care insurance has never become particularly popular. Their relative unpopularity appears to be for two primary reasons: The insurance is expensive, and you never receive a payout if you never need long-term care.
This “use it or lose it” feature is hardly unique to long-term care insurance. The same is true of homeowners’ insurance, for example, yet no one ever complains it wasn’t worth it if his house never burned down.
Regardless of how irrational it may be to complain about long-term care insurance’s “use it or lose it” feature, however, it appears to be holding people back. And that’s where life insurance can provide a more palatable solution.
That’s because many, if not most, life insurance policies today contain a rider that provides an “Accelerated Death Benefit” (ADB) in which you are able under certain circumstances — such as the need to go into a nursing home — to get access to a portion of the policy’s death benefit before you die. Upon your eventual death, whatever portion of the death benefit that hadn’t been paid out is then paid to your heirs.
Notice that these riders neatly sidestep the “use it or lose it” feature of traditional long-term care insurance: If you don’t use your ADB, then the insurance company pays to your heirs the full amount of your policy’s death benefit. In many cases, furthermore, ADB payouts are tax-free (though by all means confirm that with your retirement specialist to make sure).
Little wonder that “the sale of life insurance policies with long-term care riders has increased dramatically over the past few years,” according to Jamie Hopkins, a professor of taxation at the American College of Financial Services in Bryn Mawr, Penn. (The quotation is from his book “Rewirement: Rewiring the Way of You Think About Retirement!”)
Furthermore, depending on a number of factors — your health, age, marital status, and so on — your premiums may be lower for a life insurance policy with an ADB rider than for long-term care insurance whose maximum payout is the same as your life insurance’s death benefit.
What if you have an existing life insurance policy that does not have a rider allowing you to access the death benefit for long-term care expenses? The insurance company may be willing to add the rider to your existing policy, or allow you to roll it over into a new policy that does have that rider. Don’t forget, however, that any use of your death benefit for long-term care reduces the amount your heirs will otherwise receive upon your death.
Another factor to bear in mind is the fee the life insurance company may charge for the ADB. Be sure to shop around, as prices “vary considerably,” according to Hopkins.
To be sure, Hopkins adds, using life insurance to pay for long-term care may not be the best option for everyone. “Each person’s situation is different, and you need to see whether any of these [long-term care financing] solutions fit your situation.”
Hopkins also holds out tantalizing hope that new financing solutions may be developed in the future that have even more advantages than what’s available currently. In any case, your individual circumstances are likely to change over time as well. For both reasons, your retirement plan for financing long-term care “will likely need continued monitoring and adjusting.”
Who knew that financing long-term care could be an area of such innovation and excitement?
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.
