there’s a good chance you’ll need long-term care as you get older. But if you’re like many Americans, you probably don’t have a plan to pay for this kind of care.
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Americans are increasingly concerned about how they will pay for long-term care, according to a recent study by limra, an industry-funded financial services research group. That concern has increased from 12% in 2019 to 37% in 2021. According to the study, six out of 10 Americans would consider a combined life insurance policy, a life insurance policy with a long-term care component.
Reading: What is hybrid life insurance
Although about half of adults turning 65 today will develop a disability that is severe enough to require assistance with activities of daily living, only 11% have long-term care insurance coverage that will help. to pay the cost of care, according to the urban institute. People often don’t recognize the need for this type of coverage because they underestimate the cost of care. and wrongly assume that medicare and health insurance will cover long-term care.
Also, the cost of long-term care insurance can be a barrier to getting coverage. “Traditional plans get a bad rap because there have been a lot of premium increases,” says Matthew Sweeney, life and long-term care specialist, Discovery Inc. in virginia “when people hear ‘long-term care insurance,’ they say ‘i’m not interested’.”
The thought of paying high premiums for coverage they may not need leaves a bad taste in people’s mouths. But there is an alternative to traditional long-term care insurance on a use-it-or-lose-it basis. Hybrid life insurance products provide long-term care coverage if needed, or a death benefit if the policy is not used to pay for care.
Before you opt for one of these products, understand what they are and if they are right for you.
the high cost of long-term care
Long-term care costs are high. Genworth Insurer’s 2021 Cost of Care Survey estimated the average monthly costs of care at multiple locations in the United States.
average monthly cost of care
According to Genworth, in 2021 the average annual cost of a private room in a nursing home was $108,405. And the cost of care is rising.
altarum, a nonprofit research and consulting organization, estimated that more than half of Americans entering their twilight years will need long-term care averaging $266,000 per person over about two years for a disability self-care, which is a disability that lasts for at least six months and makes it difficult for a person to bathe, dress, or move around the house. more than half of that money will be spent out of pocket.
For those who need a high level of care, the average length of care is 3.9 years, according to the bipartisan policy center. if you fall into that category, your care could cost you several hundred thousand dollars.
Then there is the added stress and burdens placed on family members who often provide long-term care.
why you can’t count on medicare or medicaid to help
Medicare, the government health insurance program for adults 65 and older, will pay for short stays in skilled nursing facilities for therapy or rehabilitation services after a hospital stay. will not pay for long-term care, which is assistance with what are called “activities of daily living”:
- use the bathroom
- to move (to or from a bed or chair)
- care for incontinence
- a single premium hybrid policy
- a hybrid policy that pays the insured up to age 95
- a long-term care insurance policy without life insurance benefits
This is the kind of care someone who is experiencing a physical or mental decline might need. it can be provided in the home, through community services such as adult day care, or in a center.
Medicaid, the joint federal and state health care program, will cover the cost of long-term care at home and in skilled nursing facilities. it is currently the nation’s primary payer for long-term care services. however, you must have limited income and assets to qualify for medicaid. Income requirements vary by state, but generally your assets (excluding your home and a car) cannot exceed $2,000 as an individual or $3,000 as a married couple.
Unfortunately, there may be little awareness of these drawbacks. Many people plan to rely on Medicare or Medicaid to pay for long-term care, according to a 2018 study by the Lincoln Financial Group and Versta Research.
how insurance can help
Long-term care insurance can be used to pay for care when the policyholder is unable to perform two of six activities of daily living or has cognitive impairment, says Tim Dona, president of Newman Long Term care, an independent insurance agency. company in minnesota. covers the cost of care at home, in adult day care, in assisted living facilities, and in skilled nursing facilities.
Most long-term care policies will also cover modifications to your home to make it easier to stay there for care, dona says.
The amount of coverage a policy will provide will depend on the benefit period and amount of benefits you elect. The average benefit period policyholders choose is three years, Dona says. and a typical plan pays $3,500 to $5,000 per month in benefits. the maximum benefit is then based on the monthly benefit amount and the benefit period. For example, a long-term care policy with a monthly benefit of $5,000 and a benefit period of three years would have a maximum benefit of $180,000.
Depending on how long you need care and how much it costs, long-term care insurance may help cover some or even all of the cost of care.
But traditional long-term care policies are a use-it-or-lose-it proposition. “If you don’t need long-term care, you’re left feeling like all those premiums were for nothing,” Dona says.
how hybrid insurance solves the problem of use it or lose it
Life insurance policies that include a long-term care benefit can ease worry about paying for long-term care insurance that you may never use. These combined or hybrid life insurance policies can be used to pay for long-term care expenses and will pay a death benefit when the insured person dies.
Bundle life insurance policies have grown in popularity over the years, but limra reported that policy types actually decreased by 7% in 2020. 421,000 blend life insurance policies were sold that year.
types of hybrid life insurance products
Life insurance policies that include long-term care benefits are permanent life insurance policies, not term life policies. there are a few different types of these hybrid long-term care products.
linked benefit life insurance
A linked benefits insurance policy is a true hybrid policy that links a life insurance policy with a long-term care policy. Typically, the long-term care benefit amount is equal to about five times the premium you pay, Dona says. for example, a healthy 55-year-old man who paid a $100,000 lump-sum premium could get nearly $523,000 worth of long-term care benefits. The death benefit would be $174,000, based on a quote provided by Newman Long Term Care.
According to the American Long-Term Care Insurance Association, 84% of long-term care protection purchased in 2019 was linked benefits coverage. only 16% had separate long-term care insurance.
buy a long-term care clause in a life insurance policy
When you buy life insurance, you may have the option to add a long-term care rider (it can’t be added later). Typically, these long-term care benefits aren’t as strong as with a traditional long-term care policy or linked benefits policy, says Craig Roers, director of marketing for Newman Long-Term Care.
“This approach might be good for someone for whom life insurance is more important than long-term care insurance, since long-term care is sometimes a ‘btw,’” he says.
Both products will be paid for through reimbursement of the actual cost of care or an indemnity model that pays a certain cash benefit regardless of the actual cost of care. When you use the long-term care benefit, the death benefit is reduced. however, most of these policies still offer a death benefit of $15,000 to $20,000 if you use all of the coverage for long-term care, dona says.
chronic illness or critical illness rider in life insurance
By adding a critical illness or chronic illness rider when you buy life insurance, you can later take money from your own death benefit to pay for care if you have a chronic illness that will last the rest of your life.
“It wouldn’t cover something like extended care needed because of a hip replacement, but true long-term care insurance would,” says roers. these riders use the indemnity model and pay you a lump sum if you develop a qualifying illness.
advantages of hybrid life insurance
In addition to paying a death benefit if long-term care is not needed, hybrid life insurance products have other features that may make them more attractive than traditional long-term care insurance.
premiums are consistent
The premium is guaranteed on hybrid products and will not increase over time, voegele says. this appeals to consumers because (sometimes very high) premium increases were common with traditional long-term care insurance policies in the past. Insurers can now price long-term care policies more accurately, making rates less likely to increase, according to the National Association of Insurance Commissioners.
Hybrid life/long-term care insurance products offer flexible premium payment options. you can make a one-time payment or pay premiums over time, dona says. traditional long-term care policies generally do not offer a single-premium payment option.
might be easier to get than long-term care insurance
It may be easier to qualify for coverage because underwriting may be less stringent with a hybrid policy than with a traditional long-term care policy, voegele says.
money can be used to pay for a family caregiver
A hybrid policy could allow you to pay for a family member to care for you, dona says. If you use an indemnity model that pays cash instead of reimbursement for the actual cost of care, you could use that cash to pay a family caregiver. this is not an option with traditional long-term care policies, which pay claims only through reimbursement.
Permanent life insurance policies build cash value, which you can leverage to cover non-long-term care expenses. stand-alone long-term care insurance policies have no cash value.
disadvantages of hybrid life insurance
A hybrid policy may not make sense to you in other ways.
not the best investment
The biggest downside to a hybrid product is that you don’t get the best coverage for your money, dona says.
“You don’t have to pay the insurance company to pack them,” he says. If your main concern is long-term care, you’ll get more coverage for your money with a separate long-term care policy. and it will be cheaper than a hybrid policy because you are not paying the life insurance benefit.
For example, a 55-year-old couple would pay $5,532 a year for a linked benefits policy with a $150,000 death benefit and a $330,000 long-term care benefit, Dona says. however, they would pay $4,000 a year for a stand-alone long-term care policy with a benefit of $330,000.
longer deletion (wait) periods
Hybrid policies have limited ability to be customized to individual needs, voegele says. For example, the period you must wait before benefits kick in is typically 90 days with hybrid policies. traditional plans can have elimination periods ranging from 30 days to two years, she says. a longer period may reduce the premium.
Long term care payments can reduce cash value and death benefits
Long-term care payments can substantially reduce the cash value or death benefit of a hybrid policy. If you bought the policy because you have loved ones who will need the death benefit, that benefit won’t be there if you’ve used all the money for their care.
may not include inflation protection
Hybrid policies don’t always include an inflation protection option, Roers says. this option increases the cost of a policy, but allows the value of the policy to increase with the rising cost of long-term care.
less tax benefits
The tax benefits of hybrid policies may not be as generous. Both traditional and hybrid long-term care insurance payments are tax-free. however, if you are self-employed, you can deduct the cost of your long-term care insurance premiums. With a hybrid policy, you can’t deduct the entire premium, just the portion that goes toward long-term care coverage, Roers says.
not eligible for medicaid programs
Traditional long-term care policies are often eligible to be part of state Medicaid partnership programs. With a partnership policy, you don’t have to spend all of your assets to qualify for Medicaid. Hybrid policies aren’t eligible for these partnership programs, Roers says.
how and when to take out hybrid insurance
lincoln financial and oneamerica are the top two providers of hybrid life insurance policies, dona says. Other insurance companies that sell this type of coverage include Nationwide, Pacific Life, and Securian Financial.
Most people who buy stand-alone long-term care coverage tend to be in their early 50s. those who buy hybrid policies tend to be older, dona says. Some hybrid life insurance companies will even write policies for people up to age 85.
One reason buyers of hybrid insurance policies tend to be older is that these products were originally designed to be purchased with a large lump-sum payment of $50,000 or $100,000, dona says. older adults are more likely to have that kind of cash in savings or an annuity.
It may also be easier to qualify for a hybrid policy than a stand-alone long-term care policy if you’re older because underwriting is less stringent. Insurers tend to be more relaxed about what medical conditions they will accept and still issue a policy, Dona says. your premiums will still be lower if you’re younger and in good health.
When applying for a policy, you will need to complete a questionnaire about your health and have a telephone or in-person interview. the insurer might verify her medical records and prescription history, and might require a life insurance medical exam, she says. If her health is an issue, she may be able to purchase an annuity with a long-term care benefit because she only has to answer a series of questions. however, this option does not include a death benefit.
the cost of the coverage
You will pay more for long-term care coverage with a hybrid policy than with a stand-alone long-term care policy. however, hybrid policies can be cheaper for women, dona says. men pay more because the life insurance component is more expensive for them.
Here’s a look at the cost of three different types of policies Prosperante offers:
Let’s take a look at the different long-term care insurance options that Prosperante offers.
costs and initial values of insurance at age 55 for men
projected values of previous policies for men at age 82
costs and initial values of insurance at age 55 for women
projected values of previous policies for women at age 82
These are the costs of oneamerica’s single premium and recurring premium coverage.
oneamerica linked benefits single premium policy
oneamerica recurring premium linked benefit policy
other ways to use life insurance to pay for long-term care
If you already have a permanent life insurance policy, you may be able to convert it to a hybrid policy using a 1035 exchange, says Sweeney Recovery Inc. you must be health-qualified for the new policy and you must have accumulated enough cash value in the existing policy to fund the new policy.
You could also use a cash value life insurance policy to pay for long-term care. you can apply for a loan, withdraw cash, or cancel the policy entirely for the cash value.
You may be able to sell a permanent life policy to a life insurance broker for cash if you are 65 or older. you’ll get less than the death benefit but more than the cash surrender value. be careful because the payment may be subject to taxes.
If you have a term life insurance policy, you may be able to access a portion of the death benefit while you’re still alive to pay for care. Term policies typically have an accelerated death benefit that allows you to use up to 50% of the death benefit amount if you’re terminally ill, Sweeney says. the payment may be taxable and will reduce the death benefit your beneficiaries receive. Before using any of these strategies, read the fine print on your insurance policy. Sweeney recommends talking to her insurance agent to understand the implications and review the downsides.
And if you’re considering a hybrid policy or a stand-alone long-term care policy, work with an agent who specializes in long-term care coverage. one size certainly does not fit all. so you’ll need an expert to help you weigh your options.