Life Insurance: Is Ltc Rider Worth The Cost?

As people age, the probability of incurring a disability or illness that requires long-term care increases. About 70% of people turning 65 today will need long-term care, which can cost almost $9,000 a month for a private room at a nursing home facility. Long-term care insurance helps pay for nursing homes, hospice care, adult day care, and assistance with activities of daily living, such as bathing, dressing, and eating. However, long-term care insurance can be expensive, and not everyone can afford it. This is where long-term care (LTC) riders come in. An LTC rider is a policy add-on that can be added to a life insurance policy to provide financial protection while the insured is still alive but unable to take care of themselves due to illness. While LTC riders offer a potential solution, they also come with certain conditions and limitations that need to be carefully considered before making a decision.

What is a long-term care rider?

A long-term care (LTC) rider is a type of life insurance rider that can be added to your policy, allowing you to use part or all of the policy's death benefit for long-term care while you are still alive. This rider can help you pay for long-term care expenses that traditional health insurance does not cover, such as a home healthcare worker, long-term care facility, or nursing home.

LTC riders are typically only available for whole and universal life insurance policies and cannot be added to term life insurance policies. However, it is important to check with your insurer to find out what is possible, as some companies may offer LTC riders with term policies.

To use an LTC rider, you must be unable to perform at least two functions of daily living, including eating, bathing, getting dressed, walking, and toileting. The amount available for long-term care expenses is usually limited to between 70% and 80% of the death benefit, paid out monthly. For example, if you have a $250,000 life insurance policy and your insurance company allows 80%, the most you could take out for long-term care with the rider is $200,000.

There are two types of payouts you can receive from an LTC rider: indemnity and reimbursement. Indemnity plans are more expensive and are paid out as a lump sum, while reimbursement plans are the most popular and cost-effective, allowing you to submit receipts for your care costs to be reimbursed.

The cost of adding an LTC rider to your policy will vary by insurer and type of life insurance. It tends to be expensive, adding upwards of $600 to $800 a year to your life insurance premiums.

Before buying a policy with an LTC rider, carefully read the terms and conditions, as benefit amounts, qualifying conditions, waiting periods, and payout methods vary based on the insurer and policy.

Pros and cons of a stand-alone LTC policy

A stand-alone long-term care policy is a good idea for people who can afford today's premiums and potential future rate hikes. However, there are several drawbacks to consider before purchasing this type of policy.

Pros

• Stand-alone policies are typically cheaper than hybrid policies and may offer the option to purchase additional coverage in the future.
• A stand-alone policy may be an affordable way to cover long-term care expenses, as you pay small amounts each year to cover large expenses in the future.
• Stand-alone policies can be a good option for those who want to protect their assets and have more flexibility in choosing their care options.
• Stand-alone policies are usually guaranteed renewable for your entire life as long as you keep paying the premiums.

Cons

• Stand-alone policies can be very expensive to purchase and often have no cash value.
• Premiums tend to increase over time, and you may lose coverage if you stop making payments.
• Underwriting can be time-consuming, and you must be healthy to qualify.
• If you cancel the policy, all the money you paid into it is wasted.
• People generally don't like the "use it or lose it" nature of these benefits.
• Stand-alone policies may not offer enough coverage for long-term care needs, especially if you need care for an extended period.
• Stand-alone policies do not always include inflation protection, which means the benefits may not keep up with the rising costs of long-term care.
• It can be difficult to recover the premiums you've paid if you never need long-term care.
• Stand-alone policies may not be eligible for state Long-Term Care Partnership Programs, which allow you to qualify for Medicaid without spending down all your assets.

While stand-alone LTC policies have their drawbacks, they can still be a good option for those who want to protect their assets and have more flexibility in choosing their care options. However, it's important to carefully consider the pros and cons before making a decision.

Pros and cons of a hybrid long-term care rider

Pros of a Hybrid Long-Term Care Rider

Hybrid life insurance policies that include a long-term care benefit can be a good way to hedge your bets. They offer peace of mind that you have a source of money for long-term care, but if you don't need it, your beneficiaries will get a life insurance payout.

• Consistent premiums: Hybrid policies have guaranteed premiums that won't increase over time, which appeals to consumers due to the high increases in premiums that were common with traditional long-term care insurance policies in the past.
• Flexible premium payment options: Hybrid life insurance/long-term care products offer flexible premium payment options. You can make a single lump-sum payment or pay premiums over time. Traditional long-term care policies typically don't offer a single premium payment option.
• Easier to get approved: It can be easier to qualify for coverage because the underwriting can be less stringent with a hybrid policy than a traditional long-term care policy.
• Money can go to pay a family caregiver: A hybrid policy might allow you to pay a family member who provides care for you. If it uses an indemnity model that pays cash rather than reimbursement for the actual cost of care, you could use that cash to pay a family caregiver. This isn't an option with traditional long-term care policies.
• Build cash value: Permanent life insurance policies build cash value, which you can tap to cover expenses other than long-term care. Stand-alone long-term care insurance policies don't have cash value.

Cons of a Hybrid Long-Term Care Rider

• Not the best value for money: If your top concern is long-term care, you'll get more coverage for your money with a stand-alone long-term care policy. A hybrid policy will be more expensive because you're also paying for the life insurance benefit.
• Longer waiting periods: The period you must wait before benefits kick in is typically longer with hybrid policies (around 90 days) compared to traditional plans, which can have shorter waiting periods of 30 days.
• Long-term care payouts reduce the death benefit: Long-term care payouts can substantially reduce the death benefit of a hybrid policy. If you bought the policy because you have loved ones who will need the death benefit, that benefit won't be there if you tap all the money for your care.
• May not include inflation protection: Hybrid policies don't always include an inflation protection option, which increases the cost of a policy but adjusts its value to keep up with the rising cost of long-term care.
• Limited tax benefits: While both hybrid and traditional long-term care insurance payouts are tax-free, if you're self-employed, you can only deduct the portion of your premiums that go toward long-term care coverage with a hybrid policy. With a stand-alone long-term care policy, the entire cost is tax-deductible.
• Ineligibility for Medicaid programs: Traditional long-term care policies are often eligible to be part of state Long-Term Care Partnership Programs, which means you don't have to spend down all of your assets to qualify for Medicaid. Hybrid policies are not eligible for these partnership programs.

How does a long-term care rider work?

A long-term care rider is a type of life insurance rider that can be added to your policy, allowing you to use part or all of the policy's death benefit for long-term care while you are still alive. This rider can help you pay for long-term care expenses that traditional health insurance does not cover, such as a home health care worker, long-term care facility, or a nursing home.

If your insurer offers long-term care riders, you can typically add one to a permanent policy such as universal life insurance or whole life insurance. LTC riders are not usually added to term life insurance policies, but it is worth checking with your insurer to find out what is possible.

To qualify for the long-term care benefit via your LTC rider, a licensed health care professional must diagnose you with a qualifying chronic health condition. You must also be unable to independently complete a certain number of daily living activities, which might include eating, bathing, using the bathroom, dressing, undressing, and moving around freely.

If you qualify for the benefit, your life insurer may distribute up to the allowed amount, which may be set as a lump sum or as a percentage of your policy's death benefit each month. Monthly allowed amounts vary but could range from 1% to 4% of your death benefit. Most policies have a waiting period, usually around 90 days, before you can begin receiving the benefit.

There are two types of payouts you might receive: indemnity and reimbursement. If your policy provides indemnity payments, you get a set amount each month to use however you want. If you have a reimbursement plan, you submit receipts for your monthly bills, and the insurance company reimburses you for covered expenses.

The cost of adding a long-term care rider to your policy will vary by insurer and type of life insurance. When shopping for a life insurance policy, ask your prospective insurer for a quote with an LTC rider attached so you can compare rates between different providers.

Is a long-term care rider worth it?

A long-term care rider is a living benefit that can be added to a life insurance policy. It allows you to access a portion of the policy's death benefit to pay for long-term care expenses while you are still alive. This can include the costs of a nursing home, private nurse, or other assisted medical care.

The benefit of a long-term care rider is that it provides financial protection if you become too ill to take care of yourself. It can also be more affordable than a standalone long-term care policy. However, adding a long-term care rider to your life insurance policy is expensive and will likely increase your insurance costs. It may also not provide enough coverage for all your medical needs.

When considering a long-term care rider, it is important to weigh the pros and cons. On the one hand, it can provide peace of mind and financial protection. On the other hand, it is costly and may not offer sufficient coverage. Additionally, it is important to remember that using the rider will reduce the death benefit that your beneficiaries will receive.

Overall, whether or not a long-term care rider is worth it depends on your individual needs and financial situation. It may be a good option for those who want the peace of mind of having financial protection for long-term care, but it is important to carefully consider the costs and benefits before making a decision.

Frequently asked questions