How Can I Plan for Long-Term Care?

Posted by Andy Anderson, CFP® on 10:21 AM on September 29, 2022
Andy Anderson, CFP®
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Some life insurance policies only pay a death benefit if the policy owner dies during a certain period—the “term” of a term life insurance policy. Others pay out a death benefit no matter when the policy owner dies—these policies are considered “permanent” policies and are intended to remain in-force for the entirety of the policy owner’s life.

While you may be aware that one purpose of a life insurance policy is to provide a death benefit at death, you may not be aware that certain life insurance policies can also be used to provide cash payouts to cover long-term care (LTC) needs.

In addition to traditional LTC policies that only provide a benefit if the owner experiences a LTC need, life insurance policies with LTC benefits should be considered when evaluating how to cover a potential future LTC need.

As previously stated, individuals can purchase a traditional LTC policy to cover the risk of LTC expenses in the future. Like a term life insurance policy, these policies only stay in force as long as premiums are paid, and they only provide a benefit if the owner of the policy experiences a covered LTC expense while the policy is in force. If the owner dies without ever using the policy, then no benefit is ever received.

Turning to products that are life insurance policies at their core—but offer additional LTC benefits—could provide a sweet spot to an individual that wants to protect against future LTC risks while still receiving some type of death benefit in the event they die without experiencing a LTC event.

What are some Options to pay for Long-Term Care?

1. Permanent life insurance policy with a LTC rider

At it’s core, this is a life insurance product that is intended to provide a death benefit regardless of when the owner dies (premiums can be paid for life or for a set period of time, but can be structured to ensure that the policy does not lapse). The LTC rider attached to this type of policy would then allow the owner to access some of the death benefit while living if it is needed to cover LTC expenses.

This means that premium dollars can be leveraged to provide increased LTC benefits if they are needed, or a payout to beneficiaries at death if they are not needed. These products generally provide a higher death benefit for the stated LTC benefit compared to the hybrid product we will discuss next. This solution usually requires more in premium payments than a traditional LTC policy, but could be appropriate for an individual that wants to reduce the risk of a LTC event while being assured of receiving a death benefit if they do not need the LTC benefits.

2. "Hybrid” long-term care policy or “Asset-based” policy.

The mechanics of this type of policy are similar to the life insurance product just described, but the focus is less on death benefit and more so on providing LTC coverage. The reason it is sometimes referred to as a “hybrid” policy is because its main goal is to provide affordable LTC coverage like the traditional LTC policies, but still have a death benefit attached to ensure that either the policy owner or their heirs will receive some benefit regardless of whether it is needed for LTC.

If we were to compare the three products—assuming an equal LTC benefit for each of them—the traditional LTC policy would generally be cheapest but provide no death benefit, the life insurance policy with a LTC rider would generally be the most expensive and provide the highest death benefit, and the hybrid policy would fall between those two both in terms of cost and death benefit available.

There are many different types of insurance to cover many different needs, and the long-term care landscape is no different. Any of these options could successfully cover an individual’s needs. The important question to ask is “what are my top priorities in covering this risk.” From there it’s a matter of choosing the tool that best achieves those priorities.

If you feel you have a long-term care risk that is not adequately covered, your advisor would be happy to walk you through these and any other solutions to help you achieve piece of mind.





Topics: Financial Planning, Insurance policies, Life Insurance, Certified Financial Planner, CFP, long-term care

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