Most types of insurance we buy might result in a claim being filed and paid, such as auto, homeowners, and long-term care insurance. And, according to a U.S. Department of Health and Human Services report, 70% of people will need long-term care at some point in their lives.
One type of insurance will result in a claim being paid if the policyholder keeps their coverage in force until they die. That product is life insurance.
Since there’s a high probability that we’ll need long-term care at some point in our lives, and there’s a 100% certainty that we’re all going to die, some life insurance companies have had the foresight to combine benefits for both events in one life insurance policy. This can be done by adding an optional long-term care rider to your life insurance policy for an additional cost.
A rider is an ancillary benefit added to a life insurance policy that enhances your policy and coverage. A rider is available at an additional cost and is only in force as long as the base life insurance policy is in force. Some riders that you may be familiar with are:
- Accelerated death benefit rider
- Critical illness benefit rider
- Child rider
- Disability waiver of premium rider
A long-term care rider pays out a percentage of your life insurance policy’s death benefit while you’re still alive, unable to take care of yourself, and need to pay for care or assistance.
Learn More: Life Insurance Riders
If you become incapable of performing two of the six activities of daily living either permanently or temporarily, you will qualify to exercise the rider and receive a partial payout of your policy’s death benefit. Those six activities of daily living include:
- Walking or moving from one place to another
- Maintaining bowel and bladder continence
Most life insurers will cap the long-term care benefit between 70% and 80% of the policy’s death benefit. For example, if the death benefit of your policy is $500,000 and you qualify to receive a payout through the long-term care rider, if your insurer allows a benefit of up to 80% of the death benefit, you could receive as much as $400,000 while you’re alive to pay for nursing home costs, private nursing expenses, or other medical care covered under your policy.
There will still be some gaps in your cost of care with the rider. Though it covers expenses for home health care and assisted living facilities, it won’t reimburse you for doctor’s visits, prescriptions, surgeries, and other care, which are usually covered by Medicare, Medicaid, or private health insurance.
Life insurance companies aren’t equipped to be billed by healthcare providers and pay them directly for your medical expenses, but they are adept at paying policyholder claims. For that reason, most life insurance riders are reimbursement plans. With this type of plan, you submit your expenses to the insurance company, which will then reimburse you.
Indemnity plans differ from reimbursement plans in their payout. An indemnity plan pays you a lump sum of money if you “activate” the rider by using qualifying long-term care services. Depending on the cost of those services, indemnity plans can pay out more than reimbursement plans, which does raise the premium for the rider.
Your life insurance policy with a long-term care rider is inevitably going to pay out money to someone. Either the life insurance component of the policy will pay a death benefit to your beneficiaries, the long-term care component will pay you to receive the care and treatment that you need, or both.
In addition to this certainty of eventual payment to you or your loved ones, consider these other positives and negatives.
- The policy is a wiser use of your money than keeping it in a low-yield account to pay for long-term care expenses
- Many insurers guarantee that your premium will never increase for your policy. This is important considering that some owners of stand-alone long-term care policies have seen their premiums as much as double within the past few years. The reason: the cost of long-term care has increased so much that life insurance companies haven’t profited enough from the rider to pay all of the claims submitted (though the insurers have paid all eligible claims from other income channels).
- Some policies with this rider have a money-back guarantee. The insurer will return your premium if you choose to cancel the policy within a specified period of time, such as seven years. If you cancel before the policy reaches the required number of years, you can receive back a percentage of the premiums paid.
- Adding a long-term care rider may be unnecessary if you can afford a stand-alone long-term care policy. If so, buying a term life insurance policy is sufficient for most people looking for the maximum death benefit at the lowest cost.
- The cost of the rider, coupled with other riders added to your policy, can result in your policy lapsing if you have a change in your financial circumstances.
The cost of the rider is going to vary from insurer to insurer. A long-term care rider is the most expensive rider you can add to a policy because it is priced out as an individual product, unlike other riders that can be added to your policy for a flat fee. Depending upon your age, a long-term care rider can easily increase your premium by $100 per month. As with any life insurance policy or rider, the best time to apply is when you are younger and healthier.
The high probability that you’re going to need some type of long-term care in the future makes it imperative that you have a method of paying the costs, which can currently exceed $90,000 per year. If you can’t afford the cost of long-term care insurance by itself, a long-term care rider is an excellent alternative.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
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