Did You Know?
While stand-alone LTC policies are one way to address long-term care expenses, another alternative can be what’s called a … “LTC Combination Policy.” This type of insurance policy combines a cash-value life insurance policy with a tax-qualified, long-term care benefit. These combination policies take advantage of federal income tax law (state law may differ) which allows for tax-free payment of “accelerated death benefits,” up to the policy’s death benefit or face amount, should the insured need long-term care. If LTC services are required, the policy death benefit can be used to help pay these costs. If LTC services are not needed, or only a portion of the death benefit is used to pay LTC expenses, any remaining policy death benefit (less any policy loans) passes to beneficiaries named by the insured. Such a combination policy is most appropriate when there is a need for both life insurance and long-term care protection.
There are long-term care “riders” that for an additional cost can be added to a life insurance policy which allows the insurance carrier to advance the policy’s death benefit to the insured, if long-term care is required.
Benefits: Benefits in the form of accelerated death benefits paid during lifetime can be “triggered” when the insured is considered to be either “terminally ill” (death is expected within or 12 or 24 months depending on the policy) or “chronically ill.” For long-term care purposes with most policies, an insured is considered to be chronically ill when he or she is either (1) expected to be unable to perform for 90 days two of six activities of daily living (eating, bathing, dressing, toileting, transferring, and maintaining continence), or (2) suffers from a cognitive impairment such as Alzheimer’s, dementia, or Parkinson’s disease. Some policies also offer accelerated benefits where there has been a “critical illness,” for example, a heart attack, cancer, major organ transplant just to name a few qualifying conditions.
Elimination period: Similar to a stand-alone LTC policy, before long-term care payments can begin there is also an elimination period or “waiting” period which can range from 60- 100 days. The elimination period usually only has to be satisfied one time.
Monthly LTC benefit amount: The monthly LTC benefit is a set percentage of the total death benefit, typically selected by the policy owner when the policy is purchased. There is generally also a maximum amount which is either expressed as a dollar number and/or a percentage of the policy’s face amount. Even if all of the accelerated benefits are used during the Insured’s lifetime these policies usually have a residual death benefit available to a named beneficiary.
Impact of LTC payments on policy death benefit: As LTC benefits are paid out, the policy’s death benefit is reduced dollar-for-dollar.
Indemnity vs. actual expenses (reimbursement): While a few policies pay benefits on an indemnity (once payments begin the monthly payment is the same regardless of the dollar amount of LTC expenses incurred), most policies pay benefits on an expense or reimbursement basis where they pay the lesser of the monthly benefit or the actual LTC expenses incurred. Under the reimbursement method, if LTC expenses are less than the normal monthly payment, any unused balance is held over, potentially extending the benefit period.
Paying for the policy: In many cases, a life insurance policy with LTC benefits is funded with a large, single premium. Some policies are paid through periodic premium payments. If appropriate, an existing cash-value life insurance may be exchanged tax-free for a new combination policy.
Taxability of benefits: Depending on the type of policy, long-term care benefits for terminal or chronic illnesses are received federal income-tax free under either IRC Sec. 101(g) or IRC Sec. 7702b. Policies that offer benefits for “critical illnesses” may be entitled to tax-free treatment as well but federal law is not definitive. It’s important to consult with your legal or tax advisor.
Other Factors to Consider:
Effect of inflation: Over time, the cost of LTC, like many other things that we buy, will increase. Since it may be many years in the future before long-term care is needed, consider a combination policy that offers a cost-of-living (COLI) rider. Without such a rider, there is a risk that a policy’s LTC benefits will not keep up with increases in the cost of long-term care. Generally, once a policy is in force, the death benefit does not increase.
Is this the right solution? A combination life insurance-LTC combination is simply another alternative to paying for long-term care expenses. May not be the right tool if, for example, the insured is already covered by adequate life insurance. For some individuals, a stand-alone LTC policy is more appropriate and, often-times consideration may be given to having both types of policies.
Professional Guidance is Important: The advice and guidance of legal, tax and insurance professionals is strongly recommended when planning for long-term care expenses and the various types of products available to address these needs.