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How does Life Insurance With a Long-Term Care Rider Work?

Many people who are concerned about the possibility of needing long-term care. One way to fund this possibility is by purchasing a permanent life insurance policy with a long-term care rider. This way you can access part of the death benefit to pay for long-term care while you’re still alive. Since someone turning 65 today has almost a 70% chance of needing long-term care, it’s a good idea to plan ahead.  

What is a Long-Term Care Rider?

When you buy a permanent life insurance policy, you’ll have the option to purchase a long-term care rider. You may notice that some insurance companies will throw in a chronic illness rider for free, while a long-term care rider will cost a bit extra. What’s the difference between long-term care rider and chronic illness rider? To access the chronic illness benefit, you must be diagnosed with a permanent chronic illness. A long-term care rider can be accessed if you are simply qualified for long-term care, ie. you are diagnosed not to be able to perform at least 2 out of 6 daily living activities (eating, dressing, toileting, continence, bathing, and transferring). 

How do Long-Term Care Riders Work?

First of all, you’ll have to buy a long-term care rider when you buy your life insurance policy; you can’t just add it in later. This means you need to be in relatively good health to qualify for the policy. And adding a long-term care rider to your policy comes with an additional cost to your monthly premium. Different companies price this rider differently. However, it shouldn’t add too much to your monthly premiums.

Your insurance company will decide if you are qualified to tap into your long-term care benefits. Generally, you have to have difficulty with at least two out of six activities of daily living (ADL’s), which are:

  • Eating
  • Bathing
  • Toileting
  • Transferring (getting in and out of bed, or out of a chair without assistance)
  • Dressing
  • Continence

In general, people who suffer from the following diseases are qualified. You’ll need to be diagnosed by a doctor with one of these diseases:

  • Alzheimer’s disease
  • Heart disease
  • Multiple sclerosis
  • Diabetes
  • Cancer
  • Epilepsy
  • Stroke

You must also have this impairment for at least 90 days, which is called the elimination period. This is a popular feature in both traditional long-term care insurance and hybrid long-term care and life insurance policies.

>>MORE: The 5 Best Traditional Long-Term Care Insurance Companies

>>MORE: The 5 Best Hybrid Long-Term Care Insurance Companies

How do Long-Term Care Riders Pay Out?

Long-term care riders pay either by reimbursement or cash indemnity. A reimbursement policy means you collect the receipts from everything you’ve spent on long-term care; home health aides, occupational therapists, nursing homes, etc. You submit them to the insurance company and you get reimbursed. However, surgeries, doctors visits and prescriptions are not covered. 

Cash indemnity is much easier and more flexible—your insurance company sends you a check every month, and you can use it for whatever makes your life easier.

The monthly amount benefit is usually at a pre-determined % of the death benefit of the life insurance policy. They can range from 2-4%. You have to select this % when you buy the policy. There is often a lifetime cap on total long-term care benefits as well.

If you never tap into the long-term care rider, your heirs will get the full tax-free death benefit when you die. If you used up your entire policy on your long-term care needs, however, your heirs won’t get anything. 

Advantages of Long-Term Care Riders

  • Long-term care benefits are usually tax-free
  • If you never need long-term care, you’ll heirs still get the death benefit
  • Allow you to have both life insurance benefits and long-term care benefits in one single policy
  • Life insurance with a long-term care rider can be paid for over a longer period of time. Traditional or hybrid long-term care policies are available in one pay, or 5 or 10 years only. You can choose to pay a permanent life insurance policy for 20, 25, or 30 years.
  • Some plans allow you to hire family members to help assist you with your long-term care needs

Disadvantages of Long-Term Care Riders

  • You’ll have to opt for a long-term care rider when you buy the policy—you can’t add it later
  • You have to pay additional cost for it, compared to chronic illness rider which may offer similar benefits and may be added free in some companies. Learn more the differences between a long-term care rider and a chronic illness rider.
  • If you’re in poor health, you may not qualify for the life insurance
  • Loans against the policy may deplete the amount of money available for long-term care benefits
  • If you don’t need permanent life insurance benefit, this shouldn’t be a good option for you.

Best Life Insurance Companies Offering Long-Term Care Riders

Many life insurance companies offer long-term care rider with an additional cost. The most popular ones are John Hancock, Nationwide, Transamerica, and AXA Equitable.

Long-term care rider in different permanent life insurance policies of different companies works pretty much the same. Its cost might vary a bit across companies, but should not be a deciding factor for you to select which company to go with. You should decide the company based on the premiums, the death benefit, and the cash value of policies. As long as the company offers long-term care rider, it should be good.

Last Thoughts

The cost of long-term care is rising exponentially, and most people are unprepared. Buying life insurance with a long-term care rider is a good idea because it will help pay for long-term care costs if you need them, and it gives your heirs a nice tax-free lump sum benefit if you don’t.

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