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Guide to Long-Term Care Riders and Alternatives

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    According to the U.S. Department of Health & Human Services, 60% of us will need help with daily tasks like dressing and bathing at some point. When that happens, you may need to hire a home health aide or move into a medically supervised facility. Sadly, these services aren’t cheap — they range from $4,500 to almost $10,000 a month.

    Those expenses can quickly wipe you out financially if you fund them out of pocket. This is where a long-term care rider on your life insurance policy can play a role. 

     

    What is a long-term care (LTC) rider?

    Here’s a straightforward long-term care rider definition: A long-term care rider is a life insurance feature that helps pay for ongoing, medically necessary care from a home health aide, skilled nursing facility, or nursing home. Any LTC payouts are treated as prepayments against your life insurance policy’s death benefit. 

    Tying LTC benefits to a life insurance policy can make more sense than buying dedicated long-term care insurance. LTC insurance is expensive, complicated, and hard to get. The payout terms and limits can also be restrictive. Plus, there’s the chance you’ll invest tens of thousands in premiums and never use the benefits.   

    An LTC rider can also be complicated, but it’s often more affordable than LTC insurance. An LTC rider might increase your insurance premiums by several hundred dollars annually. But a dedicated long-term care insurance plan could cost you several times more, $2,000 to $3,000 a year.

     

    Who can benefit from long-term care riders?

    Anyone who’s concerned about the cost of long-term care can benefit from a long-term care rider. At a minimum, having the rider provides peace of mind that you have a long-term care plan in place. You might be particularly motivated to plan for long-term care if your family medical history includes conditions like Alzheimer’s, dementia, or Parkinson’s. 

    Your net worth is also a factor. You benefit most from an LTC rider when you have enough money to lose, but not enough to cover your own long-term care bills. If you don’t have much, you could pay your own way until you qualify for Medicaid. That’s an unpleasant strategy, for sure, but it’s an option when your net worth is limited. It’s not an option if you own a home and have some money in the bank — but not enough to shell out six figures annually for a nursing home stay.

     

    How much does a long-term care rider cost?

    Long-term care riders range in price. PolicyGenius reports that an LTC rider can add $600 to $800 to your annual policy premium. Your exact cost will depend on several factors, including your age, health, and the set of LTC benefits you select. 

     

    How do long-term care riders work?

    Functionally, LTC riders are complex. Three areas to understand are eligibility, waiting periods, and the relationship between your LTC benefits and your death benefit. Here’s a look at each.

    1. Eligibility 

    Generally, you cannot receive LTC benefits until a physician certifies that you are unable to perform two or more activities of daily living (ADLs). ADLs are basic tasks that fully functional adults perform independently. Bathing, getting dressed, eating, and using the bathroom are examples.

    You might have trouble with ADLs following an accident or because of a new or worsening cognitive or physical condition. 

    2. Waiting period 

    Many LTC riders define a waiting period, which is something like a deductible that’s expressed in days instead of dollars. Essentially, you pay the bills through the waiting period, and your insurance benefits become available to you after that. A typical waiting period might be 90 or 100 days.  

    Waiting periods are standard, but they can substantially decrease the value of your LTC rider. In situations where your condition is temporary — say, after a fall — you might be healed before the waiting period is over. If you suffer another condition later that demands full-time care, the waiting period restarts. That means you’ll probably only use your LTC benefits for ongoing conditions rather than short-term injuries or illnesses.

    3. Death benefit reduction 

    Your rider documentation will specify how your death benefit is reduced when you take your LTC benefits. There are three components to watch: 

    • The ratio of LTC dollars to death benefit dollars. Ideally, you want this to be one-to-one. In this structure, every $1 you use in LTC benefits reduces your death benefit by $1. This is better for you than a one-to-two ratio that would reduce your death benefit by $2 for every $1 you use. 
    • The percentage of your death benefit you can use in LTC payments. Some policies allow you to use 100% of your death benefit. Others might cap it at 80% or 90%. 
    • The maximum monthly payout. The maximum monthly payout for LTC benefits is often expressed as a percentage of your death benefit. For example, your rider may allow you to take no more than 4% of your death benefit each month. Other riders may cap your LTC benefit at 1%. As you can guess, a lower percentage generally means a lower premium. 

     

    How do LTC rider benefit payouts work?

    LTC benefit payouts can follow one of two structures. In an “indemnity” policy, you will receive a fixed monthly sum once you qualify for benefits and fulfill the waiting period. You can spend those funds however you want — possibly even to pay a family member to care for you. 

    The second payout structure is based on reimbursement of actual care costs. If you have a “reimbursement” policy, you must share your care receipts to receive benefits. A reimbursement policy is more likely to have restrictions on the type of care providers you hire. 

     

    Is a long-term care rider right for me?

    If you need a plan for long-term care expenses, an LTC rider is an economical choice. Still, you should know what you’re getting into. Take a moment to review the good and bad aspects of LTC riders below.  

    Pros

    • An LTC rider usually costs less than LTC insurance.
    • If you don’t use the LTC rider benefits, you still get your death benefit.
    • An LTC rider provides peace of mind if you’re worried about long-term care costs.

    Cons

    • Your LTC rider may not fund all your long-term care costs.
    • An LTC rider may increase your life insurance premium by several hundred dollars per year.
    • Using the LTC benefits under your rider reduces your death benefit.

     

    What if I already have a life insurance policy but no rider?

    You can add a long-term care rider to an existing life insurance policy. This could be the right move if you are young and in good health. As you get older or your health declines, LTC riders become more expensive and harder to get. 

    Life settlement 

    When an LTC rider is unaffordable or unobtainable, you could explore a life settlement as an alternative. In a life settlement, you sell your life insurance to a third-party for a single cash payment. Your death benefit transfers to the new owner, along with financial responsibility for the policy. 

    The cash proceeds from a life settlement are normally several times higher than your policy’s cash surrender value. Some policies sell for as much as 60% of their death benefit. That could be the funding you need for long-term care. And, if losing your death benefit is a dealbreaker, you could use part of your sale proceeds to purchase a smaller life insurance policy.

    To explore how a life settlement might help you fund long-term care costs, contact the Harbor Life Settlements team today. We provide free policy valuations and are happy to answer any questions you have about the life settlement process. 

    Find out how much your policy is worth.

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    Catherine Brock

    Catherine Brock

    Catherine Brock is a personal finance writer who's been featured in The Motley Fool, Refinery29, Wellness.com and has made appearances on ABC7 Chicago, FOX2News St. Louis, KCAL9 Los Angeles, Fox19 Cincinnati, WGN TV Chicago and WCPO TV Cincinnati. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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