Long-term are insurance is a product created to pay for long-term care. Unfortunately, the increase in premiums caused fear among individuals who want to get covered. The insurance industry responded by coming up with a new product – life insurance with long term care.
Even if you don’t have insurance for long-term care, you can use your life insurance policy to pay for nursing homes, assisted living facilities and other long-term care services. This is one feature of life insurance that policyholders should begin to maximize since more people are living longer and might require long-term care.
To help allay everyone’s fears of outliving their retirement income and becoming a burden to their families because of devastating long-term care costs, here are ways you can use your life insurance to pay for long-term care.
Combination Products or Hybrid Life Insurance
This type of life insurance also offers long-term care benefits on top of the death benefit. In addition to this, a hybrid policy can also be used to pay for living benefits not covered by long-term care insurance such as stroke, cancer and other illnesses.
Hybrid life insurance is the industry’s answer to individuals who fear premium increases of standalone long-term care insurance. It’s appeal extends to it’s simple underwriting, which is perfect for people with family history or pre-existing conditions.
It has a major drawback though; you need to pay a lump sum of $75,000 or more to purchase a combination policy. Another thing to consider is that you might end up using most of your long-term care benefits leaving your heirs with benefits that are next to nothing.
Repurpose your Old Life Insurance through 1035 Exchange
A 1035 exchange or the Section 1035 of the Internal Revenue code is a process of converting your old life insurance policy to long-term care policy tax-free.
Given the situation that people are living longer and the risk of requiring long-term care is high, some policyholders are mulling over repurposing their life insurance to an insurance product that can help pay for their long-term care needs – long-term care insurance.
This is a practical and convenient way of funding long-term care insurance since you’re paying for the premiums using the cash value of your old policy. But before you can trade your old policy to an insurance that pays for long-term care, you need to meet certain requirements or follow 1035 exchange rules first. There’s a possibility that your new policy may even cost less than your old policy.
It’s recommended to get in touch with your insurance provider first before proceeding with 1035 exchange since not all companies accommodate this type of policy exchange.
Accelerated Death Benefits (ADBs)
An accelerated death benefit is a life insurance feature that allows you to receive a tax-free death benefit of your policy even if you’re still alive. Some insurers offer this feature for free or for a nominal cost while there are others that ask for extra premium.
Here are situations you can receive a tax-free cash advance on your life insurance:
- You can no longer carry out your Activities of Daily Living (ADLs) such as eating, bathing or dressing and you are confined to a nursing home permanently.
- You are terminally ill.
- You need long-term care services for an extended period of time.
- You have a life-threatening illness such as cancer.
You should take note that the long-term care benefit you can get from your life insurance with accelerated death benefits is equal to 2% of the face value of your policy. Also, keep in mind that the accelerated death benefit your received is subtracted from the amount of money your beneficiaries will receive when you die.
Sell your Life Insurance through Life Settlements
Through life settlement, you can sell your life insurance policy and use the proceeds to fund your long-term care needs. This option is available to men 70 and up and for women 74 and up.
But according to AARP, you should proceed with caution since there are some drawbacks involved like having difficulty qualifying for Medicaid.
If you’re really keen in selling your life insurance, do it when you actually need long-term care because insurers give large percentage of the death benefit when the policyholder has a short life expectancy.
Sell Your Policy through Viatical Settlements
Viatical settlements allow you to sell your life insurance and use the money to pay for long-term care. However, this is only applicable for policyholders that are terminally ill.
Unlike life settlements, the proceeds from viatical settlements are tax-free if you are terminally ill and your life expectancy is two years or less.
Below you can find NAIC guidelines for viatical settlements.