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Combining Life and Long-Term Care Insurance

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Life Insurance With Long-Term Care

Having the right insurance coverage is an important part of financial planning. Life insurance, for example, can help your loved ones have peace of mind if you pass away. Long-term care insurance can cover costs related to nursing care so you don’t have to drain your retirement or other assets. Some life insurance policies give you the option to combine the two by adding on a rider for long-term care. But is life insurance with long-term care right for you? Here’s what you need to know.

How Life Insurance With Long-Term Care Coverage Works

When you buy life insurance with long-term care included, what you’re essentially getting is a hybrid policy. There are two different elements at work: the life insurance portion of the policy and the long-term care portion.

The life insurance side pays out a death benefit to your named beneficiary (or beneficiaries) when you pass away. This is the same as virtually any other life insurance policy. For example, you might get a hybrid policy that offers $500,000 or $1 million in life insurance coverage. Typically when you get a policy that allows you to add on a long-term care rider, you’re getting some form of permanent life insurance, such as whole life or universal life. Unlike term life insurance, permanent life insurance can build cash value over time.

The long-term care part of the policy pays out money to cover nursing care expenses if you need long-term care. You may need to be diagnosed with a chronic or terminal illness for the rider to kick in, but once it does, your policy would pay for covered long-term care costs up to the policy limits. There may be limits on both the dollar amount paid out and how long benefits are paid, i.e. two years, three years or a different time frame.

What a Long-Term Care Rider Covers

The scope of a long-term care rider typically varies based on the insurer and the policy but generally, you may be covered if you’re diagnosed with one of the following and require nursing care:

  • ALS (Lou Gehrig’s disease)
  • Alzheimer’s disease
  • Arthritis
  • Cancer
  • Cystic fibrosis
  • Diabetes
  • Heart disease
  • HIV/AIDs
  • Huntington’s disease
  • Multiple sclerosis

In terms of the type of care that’s covered, it’s typically dependent on the illness you’re diagnosed with. But generally, long-term care situations involve nursing care that covers both basic needs, such as bathing, eating and dressing, as well as advanced medical care.

Depending on the policy and the long-term care rider, you may be covered when receiving care in your home or at a nursing facility. Benefits can be paid monthly or as a lump sum. If you opt for monthly payments, it may be on a reimbursement basis, meaning you pay long-term care costs up front and the insurance company pays you back. A lump-sum payment means you’d have the flexibility to spend the funds on nursing care expenses as needed.

Benefits of Life Insurance With Long-Term Care

Life Insurance With Long-Term Care

There are several good reasons to consider buying life insurance with long-term care included. First, it might be cheaper to buy a single policy that combines both types of coverage, versus buying one life insurance policy and a separate long-term care policy. If you’re trying to save and plan for retirement on a smaller budget, this kind of coverage could be the more affordable option since long-term care policies often require a large upfront premium and premium costs may increase annually.

Another benefit is that you’re not losing any money if you don’t end up needing long-term care. With a regular long-term care policy, you pay premiums based on the expectation that someday you’ll need to tap into the policy’s benefits. But if you stay healthy, then you’ve effectively paid in those premiums for nothing when you could have invested it elsewhere. Life insurance with long-term care coverage allows you to hedge your bets.

If you do need long-term care, then you have insurance benefits waiting to pay for it. And if you don’t, then that part of your policy can be converted to a regular death benefit and added on to the existing death benefit for the life insurance part of the policy.

A third reason to consider combining life insurance and long-term care insurance is that it can help you avoid spending down your retirement assets. If you have no long-term care insurance at all, then you have two choices to pay for it: take the money from your retirement savings and pay out of pocket or spend down your assets so you can qualify for Medicaid. Remember, Medicare doesn’t pay for long-term care but Medicaid will if you’re eligible for it, based on your income and assets.

Neither option might be very appealing to you if you’re hoping to build a financial legacy you can pass on to your children or grandchildren. Having a life insurance policy with a long-term care rider added on can help you avoid those scenarios.

Drawbacks of Life Insurance With Long-Term Care

If you’re considering combining your life insurance and long-term care coverage, there are three main drawbacks to keep in mind.

First is the cost. While getting two policies in one may be cheaper than getting separate policies, you may still have one single higher premium. And you may have to pay a sizable lump-sum premium up front to fund the long-term care part of the policy. Depending on how much you have in savings, that may or may not be realistic for you.

Second, combining policies means that you may end up with a smaller death benefit than you actually need or want. If you don’t use the long-term care part of the policy, that amount could be added on to the death benefit but there’s no guarantee that will happen. So if you don’t have enough life insurance with the long-term care rider, you may need to supplement it with another smaller policy, which means added costs.

Third, and perhaps most importantly, the amount of long-term care coverage included in the policy may not be enough to cover all of your care needs if you end up spending years in a nursing home. At that point, you’d be back to the two options mentioned earlier, which are paying out of pocket or spending down assets to become Medicaid eligible.

Bottom Line

Life Insurance With Long-Term Care

Getting life insurance with long-term care insurance can kill two birds with one stone, but there are some potential downsides. Evaluating your life insurance needs as well as what you think you might need for long-term care, then comparing that to what you can afford to pay for insurance coverage or out of pocket can help you decide which type of policy works best for you.

Tips for Investing

  • A financial advisor can help you plan for medical costs and insurance needs as you grow older. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  •  Figuring out how well prepared you are to retire and to enjoy the kind of lifestyle you’ve always hoped for means sorting through numerous factors. SmartAsset’s retirement calculator can simply the task and give you a clear idea of where you stand.

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