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Money June 2014

Dollar Sense

A Way to Pay for Long-Term Care: Your Life Insurance Policy May Help

By Teresa Ambord

The idea of combining life insurance with long-term care insurance addresses the fear of paying for insurance you will not use. In one way or another, we’re all going to die, so life insurance will get paid out to someone. Generally the amount of life insurance which is usable for long-term care costs is a percentage of the total amount of life insurance.

Finding a way to pay for long-term care is a problem which plagues many of us. The chance we or someone we love will need it, at least temporarily, is pretty strong, and the cost can be back-breaking. On the other hand, many people hesitate to buy long-term care insurance because it means paying for something we may never use. That’s the nature of insurance… it’s a gamble. But if you have a life insurance policy, it might include some help with long-term care costs.

Pull out your policy (or call your agent) to see if your coverage includes one or more of these terms: combined life and long-term care coverage, life settlements, accelerated death benefits, or viatical settlements.

Here’s a closer look at these policy types.

 

Combined Life and Long-term Care Coverage

These are fairly new and still evolving. The idea of combining life insurance with long-term care insurance addresses the fear of paying for insurance you will not use. In one way or another, we’re all going to die, so life insurance will get paid out to someone. Generally the amount of life insurance which is usable for long-term care costs is a percentage of the total amount of life insurance.

 

Life Settlements

Life settlements are a type of policy which allow the owners to sell their policies for cash, after a certain age. Generally these policies are only offered to men over age 70 and women over age 74. People tend to buy life settlement policies for the express purpose of someday paying for long-term care, should it become necessary.

You should remember these key points about life settlements. According to longtermcare.gov:

  • There are no health screenings required, so the condition of your health does not matter.
  • When you sell a policy, the proceeds represent the current value of the policy.
  • The proceeds of the sale may be taxable.
  • Selling the policy will mean there will be little or no death benefit to leave to your heirs.

 

Accelerated Death Benefits (ADBs)

Some life policies include ADBs, which permit policyholders to get advances on death benefits during their lifetimes, tax-free. Depending on the policy you may have to pay extra for this feature, or the insurer may include it for little or no additional cost.

ADBs serve different purposes. The benefits may kick in if:

  • If you need long-term care for an extended time.
  • If you are permanently confined to a nursing home and need help with performing the basic daily life functions.
  • If you are diagnosed with terminal illness or a life-threatening disease.

You should know, these advances are not likely to cover all your long-term care costs, but they help. Suppose the event that triggers this benefit is the need for long-term care. Then the benefit would generally equal 2 percent of the face value of the policy. So a $500,000 policy would generate a $10,000 cash advance for long-term care costs.

If the care that is needed is home care (as opposed to nursing home care), the benefit is 1 percent. So on a $500,000 policy that would be $5,000 toward home care.

Depending on the policy, you may get the payments based on eligibility even if the care is not received. Whatever advances you do receive will be ultimately subtracted from the death benefit left to your heirs.

A nice aspect of ADBs is that there may be little or no health screening required (although some do require health screenings, so be sure to ask). So while a pre-existing condition may make you ineligible for long-term care insurance, you should still be able to get coverage through a life insurance policy with an ADB feature.

 

Viatical Settlements

This is a type of insurance which permits you, as the holder, to sell your policy to a third party in exchange for funding to pay long-term care costs. These policies, however, are only available to the terminally ill. No health screenings are required.

Suppose you take the viatical option. First, the viatical company pays you, the policyholder, a percentage of the plan benefit. The amount of the benefit depends on your life expectancy. Then the company will take over the policy payments and you will receive money for the care you need. However, when you pass away, the death benefit will be paid to the viatical company, not to your heirs. Unlike life settlements described earlier, viatical settlements are not taxable, if:

  • The policyholder is chronically ill and has a life expectancy of two years or less and,
  • The company is licensed in the state where it conducts business

According to longtermcare.gov these are the typical benefits, depending on the life expectancy of the policyholder.

  • 1-6 months pays a benefit of 80%
  • 6-12 months pays a benefit of 70%
  • 12-18 months pays a benefit of 65%
  • 18-24 months pays a benefit of 60%
  • And over 24 months pays a benefit of 50%   

It is important to note that while this can be a great plan to help with your long-term care costs, less than 50% of applicants for viatical settlements are approved. For that reason, be sure to consider all options rather than pinning your hopes on this one alone.

 

Long-Term Care Insurance is Important, But Beware of Scams

A good long-term care (LTC) policy may be a life saver. But like anything else these days, there are those looking to scam people out of their assets, including their LTC policies. These scams are based on getting seniors who don’t have LTC insurance to buy worthless policies, or getting those who do have LTC policies to drop their existing coverage and buy new policies. Of course, the fraudsters say the new policies are superior, but in reality they are bogus. Meanwhile, seniors who drop those previous policies lose whatever premiums they may have paid in for years or decades. And… in the end, they have little or no coverage at all.

These scam artists operate in several ways, including:

  • Telling purchasers that a policy covers all their needs for LTC.
  • Attempting to make a sale by scaring seniors about the future.
  • Selling policies which are out of the financial ability of the purchaser.
  • Convincing seniors to buy expensive, overlapping policies, which is unnecessary.

This process of getting clients to cancel good policies for what appears to be a better option is called “churning.” If you’ve been approached to buy a replacement LTC policy, you should know, a replacement policy is almost never better than the original. You may not learn just how worthless your new policy is till you file a claim and are denied.

In 2013, three Pennsylvania men were convicted of stealing more than $700,000 from at least 258 senior citizens who bought what turned out to be fraudulent home health care, security, and long-term care policies, across four states. Pennsylvania’s former Attorney General, Linda L. Kelly said “in some cases, victims were advised to cancel legitimate insurance policies for long-term health care in favor of the bogus programs pushed by the defendants.”

To protect yourself, deal only with reputable agents whose credentials are verifiable. Check with your state insurance department (or, http://www.naic.org/state_web_map.htm) to find out if the company is licensed. Even if it is, you need to know the insurer is financially healthy. You can find this out by logging onto ambest.com, which lists financial ratings of insurance companies. Make sure the company has been around awhile and has a good reputation. However, be aware that not all LTC insurance scams are criminal in nature. A company may be legitimate, but have overzealous agents who take it upon themselves to sell more LTC insurance than is needed. At the very least, get a second opinion.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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