Conventional whole or universal life insurance policies that double as long-term care insurance are becoming increasingly popular.
These policies give people who need long-term care access to their life insurance to pay for it, reducing the death benefit.
Life insurers can’t officially call these plans long-term care insurance because of regulations in most states, so the rules and protections may be different from conventional long-term care insurance.
Here’s an example of how these plans work from Prudential, which calls what it sells life insurance with an accelerated death benefit.
If you buy a $300,000 life insurance policy with the accelerated death benefit and you became chronically ill, you could take about 2 percent of the policy per month until it is depleted, says Shawn Hilario, a product manager for Prudential Individual Life Insurance. In this example, you’d get $6,000 a month for about four years.
To claim, you must meet the standard disability criteria, cognitive impairment or the inability to do at least two of the six activities of daily living unassisted — bowel control and using the toilet, bathing, eating, dressing and walking or transferring oneself from bed to wheelchair.
“The great thing about this is that there are no restrictions on the use of benefits,” Hilario says. “It is a medically related triggering event, but when someone qualifies and gets a cash benefit, there is no requirement to use certain services. Many long-term care policies require you to be in a facility or receiving professional care. Our benefit accommodates staying at home and hiring a friend or family member to provide care.”
Somebody will benefit
These sorts of plans also mitigate the use-it-or-lose it concerns that keep some people from buying long-term care. Because we all eventually die, somebody will get the benefit of a combo policy no matter what. The costs also reset when they are purchased, so they have none of the premium increases that people who buy conventional long-term care insurance have faced in the last few years — and will probably continue to face.
Jesse Slome, executive director of the American Association for Long-Term Care Insurance, a trade organization, says these policies are good for people who need life insurance to support a spouse, family or a charitable cause after their death. These plans aren’t so attractive if you don’t need life insurance.
“I do talk to consumers who really don’t realize that what they are buying is life insurance,” Slome says. “There is nothing wrong with life insurance, and there are many people who should own it. But people who don’t have a need for life insurance probably shouldn’t buy (a combo policy).”
Purchasers also have to have enough cash available to pay for one of these policies — or two of them if they want to cover a spouse, as well. That can add up to a lot of cabbage.
Policy expenses, complications
There are also some other things to think about before you commit.
Depending on how old you are and how healthy, a long-term care rider to a life insurance policy will cost you about 10 percent to 15 percent more than the standard life insurance policy, Prudential estimates.
You will face medical underwriting just as you do with conventional long-term care insurance. If you are able to answer “no” to a rather long list of medical conditions, you will be approved immediately. But if you have even one of these problems, there will be further questions and you may be declined.
While some of these plans offer inflation adjustments at an additional cost, not all of them do. “If you are in your 60s, the benefit that you buy may seem significant, but if you don’t need care for 25 years, you could find that 25 years from now, the benefit may not be enough,” Slome says.
Bad way to lock up money?
You’re tying up your money for a long time. Some of these plans pay some interest on the money you spend for the policy, but some pay none at all. In today’s low-interest rate environment that may not seem too terrible, but if interest rates rise, having a large amount of money locked up with little or no return will look like a very bad idea.
Having a plan to pay for long-term care insurance is smart, but don’t make a quick decision without first investigating thoroughly what you propose to buy.
Here are three ways to buy long-term care insurance.