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Using Life Insurance to Pay for Long-Term Care

May 12, 2015
Insurance, Life Insurance
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If the idea of paying out of pocket for an extended nursing home stay when you’re older gives you the heebie-jeebies, you should be aware of the life insurance types that can provide funds when you’re older.

A semi-private room in a nursing home costs an average of $80,300 a year, according to Genworth, a long-term care insurer. But for many, shelling out for a long-term care insurance policy that they may or may not use is just as unappealing. A 60-year-old couple could expect to pay $2,170 per year for $328,000 of coverage, according to 2015 research by the American Association for Long-Term Care Insurance.

However, you have other options when it comes to financing long-term care. Many people are now using features of their life insurance policies — or buying new, hybrid policies — to help with costs. Here are some ways to pay for long-term care.

Accelerated death benefits

Accelerated death benefits are included as part of many life insurance policies, though some people may have to add them through a rider. They give policyholders the ability to draw a percentage of their death benefit while they’re still alive to fund medical expenses, including long-term care.

These riders are a good option for younger adults who want a head start on planning for long-term care, says Tommy Smoot, vice president of New York Life.

If you know you’ll want accelerated death benefits on your policy, shop around. There are huge differences between companies when it comes to benefit triggers, says Daniel Glanville of Precision Wealth Management in Colorado Springs, Colorado. While some companies require you to be diagnosed with a terminal illness before providing accelerated benefits, others require only a critical or chronic condition — in other words, you could get help with long-term care expenses that result from a non-fatal bout of cancer or heart disease.

Although your benefits will vary depending on your insurance company and your original death benefit, the cost is a slam-dunk compared with other strategies. “A rider that gives you some coverage . . . is the least expensive [option],” says Chris Jorgensen of C.S. Jorgensen Wealth Management in Smithtown, New York.

“The premiums are pretty similar whether you go with accelerated benefits or not,” Glanville says. “I don’t know that I’d ever sell a policy again that doesn’t have the accelerated benefits on it.”

» COMPARE: NerdWallet’s life insurance comparison tool

Life insurance settlements

Some people who buy permanent life insurance policies when they’re young find that they no longer need the coverage later in life. In fact, they may be paying hundreds of dollars a month for a policy their family doesn’t need anymore, when they really need help with the cost of long-term care.

If you need cash more than a death benefit, consider a life settlement, also called a viatical settlement. In this transaction, you sell your policy to a third party, who takes over paying your premiums. The buyer receives your death benefit when you die.

Getting a life insurance settlement is typically more lucrative than cashing out your policy — four times more (minus transaction fees and broker commissions), according to researchers at the London Business School. But the amount you’ll receive varies. “The further you are away from that death benefit … the less money you’re going to get,” Glanville says.

Adults age 65 and older with policies worth $100,000 or more are the best fit for settlements, according to the Life Insurance Settlement Association.

If you still have a life insurance need, there are better ways of getting cash than selling your policy. “If you don’t have any heirs to pass the death benefit on to, and you have very minimal assets, then there’s a case for it,” Glanville says. But those cases “should be few and far between,” he says.

Hybrid policies

Still another option is a hybrid life insurance and long-term care policy. These allow you to use benefits for long-term care. Whatever you don’t use is passed on to your beneficiaries, like standard life insurance. “They provide double duty,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance.

But there are no free rides when it comes to coverage. The extra benefits mean hybrid policies cost more than those that just provide life insurance, Slome says.

And hybrid policies may not provide the best coverage. “Stand-alone long-term care insurance policies, for the cost of the policy, typically provide the most long-term care benefit,” says Smoot, of New York Life.

On the other hand, buying a hybrid policy may encourage people to lock in coverage earlier, when it’s more affordable. “Many people use benefits before they’re 65, which is when people usually start thinking about long-term care insurance,” Glanville says.

Do you even need life insurance?

Using life insurance to pay for long-term care can be a wise move — that is, if you need life insurance in the first place. Otherwise, Slome considers hybrid policies an unnecessary expense. “It’s not like your insurance company … is giving you this extra benefit for free.”

Likewise, not everyone needs long-term care insurance, according to Jorgensen. People with high net worth can probably afford to self-insure, he says. “On the other hand, you have the other extreme, where people don’t have a large amount of assets. Overinsuring them for this benefit doesn’t make sense … if it creates an economic hardship today.”

If you wish to have both life insurance and long-term care coverage, Slome recommends comparing hybrid products to traditional policies to see how you’ll get the best deal.

“You only buy long-term care insurance once in your life, and it really is important to compare your various options,” he says.

Alice Holbrook is a staff writer covering insurance and investing for NerdWallet. Follow her on Twitter @alicenerdwallet.

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