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Long-term care (LTC) insurance is an insurance product that will help pay for some of the costs associated with long-term care that aren't covered by health insurance, Medicare or Medicaid. Many life insurance providers today offer combination life insurance policies that attach LTC benefits to the life insurance plan. These are known as long-term care riders and can provide useful protection if you end up needing certain medical services that you otherwise could not afford.
What is a long-term care rider?
A long-term care (LTC) rider is a life insurance policy feature that allows you to receive a portion of the death benefit while you are still alive. The death benefit can then be used to pay for long-term care expenses. This type of rider is similar to the accelerated death benefit, which most life insurance policies have, but the qualifications for each are slightly different. While the accelerated death benefit requires a terminal illness diagnosis to be activated, an LTC rider can be triggered by the diagnosis of a chronic illness that leaves you unable to take care of yourself.
LTC riders are generally only available through forms of permanent life insurance such as whole, universal or variable policies. It's much rarer to find insurers that will offer living benefits for term life insurance policies.
You must choose your riders when you purchase the policy. If you choose to add an LTC rider to a policy, your total premium costs will increase accordingly.
How does an LTC rider work?
The long-term care rider add-on allows policyholders to use their permanent life insurance death benefit while they are still living. To access the death benefit, a doctor would need to diagnose you with a chronic illness first. Examples of chronic illnesses can include:
- Alzheimer's disease
- Crohn's disease
- Cystic fibrosis
- Heart disease
- Mood disorders
- Multiple sclerosis (MS)
Many other diseases may be classified as a chronic illness, but your insurance provider will have the final say on whether your situation meets its criteria for triggering the benefits of an LTC rider.
To be diagnosed with a qualifying chronic illness, you typically must have a licensed health care professional certify that you have a chronic illness that restricts you from performing at least two of the six activities of daily living (ADL). ADLs include:
- Toilet use (perform personal hygiene functions)
- Transferring (getting in and out of bed or a chair without assistance)
- Maintaining continence
Before the insurer will pay any benefits, you must show the impairment for 90 days, which is known as the elimination period. Once the impairment has been certified, the insurance provider will begin to reimburse long-term care costs.
What does an LTC rider pay for?
Typically, the combo LTC and life insurance policy will pay for services that help you perform ADLs. If you cannot complete ADLs, then you may require an at-home caregiver or admission to a long-term care facility. An LTC rider typically pays for these expenses.
Long-term care rider benefits payouts
An LTC rider will usually offer two payment methods: lump sum or monthly payment. The simplest form of payout from the LTC rider is the lump-sum payment. In this case, once you receive the check from the insurance company, you can freely spend the funds however you want on living or medical costs.
Monthly payments or reimbursements can be slightly more work compared to lump-sum payouts. With this payout plan, you would be reimbursed for the amount of money you spent on long-term care during the month. Therefore, it is crucial to keep accurate records of the long-term care costs you incurred and then submit the receipts to your insurance company for payment.
You may be allowed to choose between these two options, but some insurers make the choice for you. Make sure you understand the terms of the LTC rider before purchasing one.
Should I purchase a combo life insurance policy?
There are several factors to consider when deciding whether a life insurance policy with an LTC rider is right for you. By using the LTC rider, you will be directly reducing the death benefit of the life insurance policy. This could affect your financial planning if you still intend to leave money to your dependents. Furthermore, with the rising costs of long-term care, you may find that your death benefit has declined to zero if you require care for an extended period of time.
A combo life insurance policy should not be your sole life insurance policy if you need income protection, like paying for a mortgage or college tuition. These types of policies are specifically designed to be paired with permanent life insurance and can be used in the event of long-term care needs. If you need simple death benefit coverage, then we would suggest a term life insurance policy, which is a significantly cheaper option.
However, there are some advantages to life insurance with an LTC rider. One main advantage is that premiums for a combo policy are locked in. With a stand-alone long-term care insurance plan, the provider may increase premiums yearly. For example, Genworth, one of the largest long-term care insurance providers, increases its policy premiums yearly by getting state regulatory approval. With a combo life insurance plan, you are locked in to a steady premium rate.
In addition, you are guaranteed a return on your premium. In case you need long-term care, the premiums that you paid into the life insurance policy can be returned to you and used for assisted living expenses. On the other hand, if you never need long-term care, your policy still works as normal life insurance that pays a death benefit to your beneficiaries when you pass away.