Long term care rider

A long-term care rider will provide you with financial benefits if you are no longer able to take care of yourself.
Author: Brian Greenberg CEO of True Blue Life Insurance
Last updated April 9, 2021

What is a long-term care rider?

A Long-Term Care (or LTC) rider is an optional add-on to a life insurance policy that will provide financial benefits to the insured in the event they require hands-on daily care when unable to provide it for themselves.

In many cases, this comes as a lump sum payment per month for a certain period and may not account for inflation.

What happens if the long-term care benefits go unused?

It’s a fair question. After all, no one likes paying for a benefit that they may or may not use. So, let’s assume that you opt for a long-term care rider. As a result, you pay an additional fee every month.

Now, imagine that you pass away before ever being able to use the long-term care benefits. Did you pay years for nothing? No.

The number of long-term care funds that have accumulated over time will now pass on to your beneficiaries.

The same goes for if you used part of the funds. Say you received care for months before you passed away. There are still benefits left, and those benefits will pass on to your beneficiaries.

Does paying for a long-term care rider make sense?

Knowing something and appreciating the severity of a challenging situation are two different things. That’s especially true when dealing with complicated questions of estate and long-term care planning.

The typical nursing home stay runs about 2.5 years and that nursing home care costs range between $150 and $235 a day for a shared room or a staggering $253 a day for a private room.

Funding over $90,000 of care per year can strain budgets and bust retirement accounts, but you may not know how to even start addressing these challenges.

Anyone with elderly parents or loved ones have likely thought about how they will pay for nursing home care should that time come. This fear stems from a common situation that plays out countless times around America. A diligent, financially conservative couple who saved for retirement over the course of their working lives had a dignified retirement. Changes in one spouse’s health required entry into a long-term care facility or the use of home health aides.

After months of long-term care, the couple’s retirement nest egg is left cracked and scrambled and the independent spouse is left wondering how they will provide long-term care for themselves. They may find that their life insurance plans were drawn down to pay for long-term care or that their conservative cash savings no longer exist thanks to an atypically long stint in a nursing home. If we’re to believe actuarial data, wives can expect to outlive their husbands 80% of the time. That fact alone should pique the interest of at least half of this article’s readership. If you’re still planning and saving for retirement, it’s critically important that you start questioning how you’re going to provide for your long-term care expenses while protecting your spouse’s ability to survive once you’ve passed. With cuts to Medicaid and other senior care government programs under Congressional review, and upwards of 70% of Americans needing some form of long-term care during their lifetime, you should be taking time to review your plan to provide for yourself and your spouse in your old age.

A long-term care rider can prevent those problems.

The earlier you address the high cost of providing long-term care for your loved ones or yourself, the better off you’ll be when the time comes to foot the bill. Like most of life’s challenges, the task of providing financial support to a loved one in a long-term care facility or ensuring that you can pay for a dignified level of treatment is best addressed as early as possible.

While the least expensive way to address risk is typically to self-insure against that risk, socking away hundreds of thousands of dollars on top of savings earmarked for retirement isn’t a realistic option for most retirees. If self-insuring is out of the question, you should seriously consider adding a long-term care rider to an existing or new life insurance policy.

Long-term care riders are increasingly being demanded by worried spouses and diligent financial planners who recognize that the cost of nursing home care needs to be addressed early on in the retirement planning process.

Long-term care riders are a preferred way for people with permanent insurance to fund nursing home stays because the plans disburse tax-free money to pay for nursing home care once qualification criteria are satisfied.

The variability of long-term insurance riders is another reason why they are so popular amongst financial planners. Premiums, coverage levels, coverage for in-home care aides, and other features allow these riders to be individually tailored to satisfy your family’s unique needs. Speaking to an independent insurance broker is a great place to start if you’re interested in learning more about the long-term rider options available.

Money That Was Wasted Away

People don’t like the feeling that they wasted the money they spent. It’s why so many people don’t like leasing cars, renting houses, or buying term life insurance. At the end of the lease or term insurance policy, you’re left with nothing to show for those payments you’ve made over the past several years or decades. If you’re interested in an insurance plan that builds up cash value and allows you to borrow directly against the plan in a heavily tax-advantaged way to support your standard of living in retirement or fund a child’s education, whole life, or cash value life insurance plan is something to consider.

Whole life plans are growing in popularity because they are customizable and can feature rider enhancements to provide supplemental insurance coverage to protect against several life challenges. These riders make retirement planning far easier by introducing predictability into the typically unpredictable area of long-term insurance costs. Riders will pay for a covered person’s nursing home stay for a certain period of time, up to a certain amount of money, or pay for nursing home care until that person passes.

Because long-term care riders are attached to cash value life insurance, the money used to purchase the rider does not simply disappear at the time of the covered party’s passing. If you did not completely use a covered person’s long-term insurance rider to fund their nursing home care, the designated beneficiaries would receive either the guaranteed minimum death benefit or the death benefit of the plan and the unused portion long-term care rider’s value. This money is paid out automatically and is not subject to probate fees or estate taxes.

Long Term Care Riders And Medicaid Planning

Long term care riders and cash value life insurance policies have another major advantage over term policies for people who have modest retirement savings. If you or a loved one is on the verge of qualifying for Medicaid coverage, it may make sense to purchase a single fee whole life policy with a long term care rider. When coupled with other eligible transfers and purchases, a senior citizen can secure supplemental Medicaid coverage at no cost while maintaining a high standard of living. This approach to Medicaid planning is tried and tested and works nationwide. Speaking to an estate planning and elder law attorney along with your independent insurance broker to craft a plan that heightens benefits eligibility and protects your estate from Medicaid claw-backs is a great way to leave a legacy to your loved ones.

Don’t Want To Have To Argue For Money?

If you’ve dealt with an insurance policy provider over coverage issues, it’s possible that the experience left you with a bad taste in your moth. The advantage to long term care riders is that the coverage they offer is typically cut-and-
dry. Most policies establish certain conditions that trigger the payment of benefits. A typical long term care policy will start paying for long term care once you are deemed to be incapable of performing two or three “activities of daily living” (ADLs). These activities include being able to perform basic tasks safely, like dressing yourself or walking. Payments can also be triggered when certain disorders or conditions are diagnosed.

There are other ways to access the cash value of these plans without proving impairment of ADLs. Most commonly, these plans will authorize fund withdraws whenever you are diagnosed with life threatening illnesses, terminal diseases, qualify for in home or residential skilled nursing treatment, or are in a lengthy recovery process from a surgery or injury.

What Alternatives To Long-Term Care Riders Are Available?

Alternatives to long-term care riders attached to cash value life insurance plans are available and should be considered. If you are not going to use a long-term care rider attached to a cash value life insurance, you’re likely going to use one of the three other major ways to cover long-term care costs.

Independent Long Term Care Insurance

Once extremely popular with aging adults, the policies promised to cover the ever-increasing costs of nursing home care in exchange for a monthly premium payment. The policies resemble term life insurance products in many respects. The plans do not build cash value and never feature an investment component, so you will need to pay premiums as long as the plans are in place. These long-term care insurance policies also can be costly, confusing, and hard to get unless you are in top physical condition. If the plan’s coverage lapses for any reason, like nonpayment of a premium, all of the premium payments are lost, and the insured person is left with nothing.

The biggest disadvantage of independent long-term care insurance policies is found in the unpredictable nature of premium hikes. Unlike level-term life insurance, monthly premiums can and often do change dramatically. These policies’ drawbacks tend to outweigh the advantages, and most people are better served considering an alternative approach.

Annuity and Life Insurance Bundles

The second approach to covering long-term care costs is to use a life insurance and annuity bundle. Coupling life insurance policies with fixed or “life” annuities are an effective way to ensure that long-term care expenses are covered in a way that does not draw down the inheritance of your loved ones.

Annuities operate as contracts that bind an insurance company to make you steady payments in exchange for a lump-sum payment or a series of payments you’ve made to them over time. These plans are growing in popularity because the life insurance and annuity bundle allow you to address retirement planning concerns and long-term care funding in a streamlined product.

The tax advantages associated with annuities and cash value life insurance are desirable to high-net-worth individuals concerned about estate taxes and probate fees. Couples with more modest means should still consider this strategy because both annuities and life insurance products do not typically interfere with Medicaid eligibility.

Accelerated Death Benefit Riders

Accelerated death benefit riders are attached to whole life or universal insurance products. The riders are generally offered free of charge by insurance companies. They permit insured parties to fund extended nursing homes or residential, skilled nursing by allowing funds to be drawn away from the plan’s cash value to pay for medical expenses. Because these withdraws diminish the insurance policy’s cash value, beneficiaries can expect to see smaller payouts and lower tax-advantaged transfers at the time of their death.

Speak to your insurance broker if you are seriously considering using an accelerated death benefit rider and consider that a supplemental insurance product may be necessary to maintain your loved one’s standard of living with one of these plans.

Conclusion

Long-term care insurance riders offer an attractive, low-cost way to fund an extended stay in a nursing home without disturbing Medicaid eligibility, the standard of living your spouse enjoys, or the inheritance you’d like to leave behind to your loved ones.

While alternatives to long-term care riders exist, like long-term care insurance, they tend to be overly complicated and expensive. Anyone beginning to plan for retirement or in the process of reassessing their retirement plans ought to give serious thought to a long-term care insurance policy rider attached to a whole life plan.

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2 replies
  1. Remy
    Remy says:

    EXCELLENT, informative, interesting and well written article! I know as an insurance broker you probably have your biases but how does the average 65 year old retiree know which Permanent Life Insurance policy (company) and LTC rider is the most understandable, safe, and cost effective? Thank you!

    Reply
    • Luke Kinton
      Luke Kinton says:

      Hi Remy!

      I think it has to do with the agent you choose, honestly.

      Agents who are familiar with wealth management and retirement planning will know which companies are great for these types of policies and can shop the market with a “retiree” mindset to locate the best policy that meets your needs. Many of them will provide a few different options as well as some annuities to look over as well. If you know a lawyer who does estate planning, you can ask them who they recommend as far as insurance solutions for this type of policy.

      Perm policies are tricky and it is important to build the trust in the person who is recommending these solutions. Also, ask them what their commissions are on each product they are recommending. If they give you that information, you know you have an honest agent.

      Hope this helps a little.

      Reply

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