Life insurance with long-term care is a unique product for people interested in reducing their financial exposure to long-term care services. Long-term care services can be provided in many areas including home care, assisted living, and nursing home care.
Long-term care costs throughout the United States have become exorbitant. A recent study conducted by Genworth estimates the annual cost of a semi-private nursing room to be $93,072 per year. It is projected to grow to $149,358 per year in 2036.
Actual costs and projections vary not only from state-to-state, but from county-to-county. Visit the Genworth Cost of Care Survey to learn more about your specific location.
Can you guess what two states are the most and least expensive to receive nursing home care? Read to the end and find out.
When thinking about how you’re going to pay for long-term care expenses you typically have three options:
- Self-Insure
- Standalone Long-Term Care Insurance
- Life Insurance with Long Term Care
It is important to note that health insurance does not cover long-term care expenses. In addition, we have left government assistance from this list. If you are or become eligible for Medicare or Medical you may be eligible to receive assistance for long-term care.
Self-Insure Long-Term Care Expenses
Self-insuring simply means you have made the decision to pay for long-term care expenses out-of-pocket. Whether you are making an informed decision or are simply unaware of other options, you are taking the risk yourself.
People who choose this approach often do so for one of two reasons:
- They feel they will never require long-term care services, or
- They feel they have enough assets to afford to pay for long-term care costs without creating a financial burden for those who depend on those assets (e.g. spouse).
Standalone Long-Term Care Insurance
Until recently, standalone long-term care insurance has made a lot of sense. It offers the insured the opportunity to receive reimbursement for long-term care expenses. A standalone long-term care insurance policy has four primary components:
Daily or Monthly Benefit
This is the maximum amount of benefit an individual can access for long-term care expenses on either a daily or monthly basis. Most standalone long-term care insurance policies offer a daily benefit. Assuming a $200 daily benefit, an insured can expect to be reimbursed for up to $200 each day. Any expenses incurred over this amount will be paid out-of-pocket.
The larger the benefit amount the more expensive the premium.
Benefit Period
The benefit period is the period of time the insured will have access to the daily or monthly benefit amount. Benefit periods generally range from 1 to 10-years depending on the carrier and product. A policy with a 3-year benefit period will give the insured access up to the daily benefit amount for the length of the benefit period.
For instance, a policy with a $200 daily benefit and 3-year benefit period will give the insured access to up to $200 per day for 3-years. This is a total of $219,000 of total long-term care benefits ($200 daily benefit times 365 days times 3-years).
The longer the benefit period the more expensive the premium.
Inflation Protection
Inflation protection allows for the daily or monthly benefit to increase by 3 or 5-percent on a simple interest or compounded interest basis. The purpose of this is to allow the policy to keep up with increases in the cost of long-term care services over time.
Assuming 5-percent compounded inflation protection on a $200 daily benefit, the insured would have access to $530 per day in 20-years.
Elimination (Waiting) Period
The Elimination Period of a standalone long-term care insurance policy is the period of time between when the insured becomes eligible to receive benefits, and when they actually receive benefits.
For instance, a policy with a 90-day elimination period would begin reimbursing expenses 90-days following the insured meeting the eligibility requirements to receive long-term care insurance. Essentially, the insured would be required to pay for their own care during this time or receive care from a family member or friend.
The elimination period is selected when the policy is purchased. Most policies offer 30, 60, 90, 180, and 365-day elimination periods. The longer the elimination period the less cost it is for coverage.
Standalone long-term care insurance has traditionally been the best and least expensive way to secure long-term care coverage. However, as interest rates have continued to decline and more people are accessing benefits, the cost of this coverage has drastically increased. In addition, insurance companies can increase premiums in the future.
The most common question that comes up when considering long-term care insurance is what happens if I die and don’t ever use the coverage?
The simple answer is the coverage goes away. It’s analogous to having car insurance. You hope you never need it, but if you do you’re glad it’s there.
Lastly, if the insured passes away without requiring long-term care they have effectively paid for something they or their families will never benefit from.
Life Insurance with Long-Term Care Rider
Life insurance with long-term care is a relatively new product. It offers similar benefits as a long-term care insurance policy, but is structured differently.
For a life insurance policy to provide long-term care benefits, the policy must include a long-term care rider. The rider must be included on the policy when it is issued, and not added later. There is a cost to adding the rider.
The way life insurance with long-term care policy works is an individual purchases a policy with a long-term care rider.
NOTE: Not all carriers or products offer a long-term care rider. There are only a handful of companies make this feature available.
Long-term care benefits paid from life insurance with long-term care rider are generally paid monthly, not daily. Life insurance with long-term care usually does not include inflation protection. And, the most common elimination period is 100 days.
What makes life insurance with long-term care unique compared to a standalone long-term care insurance is monthly benefits are paid based on a percentage of the initial death benefit. It is usually 2-percent or 4-percent of the policy face amount.
A life insurance with long-term care policy with a $1 million face amount and 2-percent long-term care rider will pay up to $20,000 ($1,000,000 times 2.00%) per month for long-term care services.
The insured can access up to $20,000 per month for 50 months ($1,000,000 divided by $20,000). A policy with a 4-percent long-term care rider would pay up to $40,000 per month for 25-months.
Like a standalone long-term care insurance policy, any unused monthly benefits get added to the end of the coverage. If the insured had a 2-percent long-term care rider and only accessed $10,000 per month they would be able to access $10,000 per month for 100 months.
The Difference Between Long-Term Care Insurance and Life Insurance with Long-Term Care
When evaluating a traditional (or standalone) long-term care insurance policy versus a life insurance policy with long-term care there are three primary differences:
- Inflation Protection
- Death Benefit
- Premiums
Inflation Protection
A standalone long-term care insurance policy does offer inflation protection. This allows the daily or monthly benefit to increase on an annual basis in accordance with the chosen inflation option. This allows the daily or monthly benefit to “keep-up” with the rising cost of long-term care services.
A life insurance with long-term care policy generally doesn’t offer inflation protection. However, because the benefit is based on a percentage of death benefit, the monthly benefit is typically higher than it would be under a standalone long-term care insurance policy.
For instance, let’s compare a $1 million life insurance with long-term care policy with a $6,000 monthly benefit long-term care policy with 5-percent compound inflation.
The life insurance with long-term care policy would provide up to $20,000 of monthly benefit regardless of when long-term care is needed. If long-term care services were needed in Year 1 or Year 30 the insured would have access to $20,000 per month.
It would take a standalone long-term care insurance policy 25-years to provide $20,000 of monthly benefits.
Death Benefit
The primary difference between life insurance with long-term care and a standalone policy is the death benefit. With a standalone long-term care insurance policy, there is no death benefit. If you pass away and never require long-term care services the policy is essentially for nothing.
A life insurance with long-term care policy pays a death benefit to your beneficiaries. If you don’t require long-term care services your beneficiaries will receive the entire death benefit.
Alternatively, assuming a $1 million policy, if you used $300,000 of long-term care benefits and then passed away, your beneficiaries would receive a $700,000 death benefit ($1 million face amount less $300,000 of long-term care benefits).
Premiums
As mentioned previously, a standalone long-term care insurance policy can be subject to rate increases. A life insurance policy with long-term care is not.
Final Thoughts
A life insurance with long-term care policy can be a good alternative for those interested in insuring their long-term care risk. Life insurance with long-term care policies offers insureds a unique way to cover long-term care costs while providing a death benefit to their beneficiaries if long-term care services are unneeded.
The difference in cost between a traditional long-term care insurance policy and a life insurance with long-term care policy can be quite competitive depending on the circumstances.
So, did you figure out which two states are the most and least expensive to receive nursing home care in?
If you guessed Alaska is the most expensive state and Oklahoma is the least expensive state you would be correct.
In 2020, a semi-private nursing home room in Alaska would cost $448,950 per year. The same level of care in Oklahoma would cost $60,995 per year.
