Is Life or Long Term Care Insurance Right for You?

Is Life or Long Term Care Insurance Right for You?

There are all sorts of ways to insure your life or possibly pay for long term care. However, is insurance right for you? T know the answer, you must first know what you’re dealing with. 

Life insurance is a personal contract with an insurance company that promises to pay a benefit to your beneficiaries or estate in the result of your untimely passing. This promise of payment is in exchange for smaller monthly, quarterly, or annually payments. This personal contract is a unilateral contract, which means that the insurance company is the only party that is legally obligated to pay. While there are many types of life insurance, everyone should be familiar with the two most common types of life insurance, whole life insurance and term insurance. 

Term Life insurance 

Term life insurance is the simplest type of life insurance. Term life insurance policies offer a death benefit and remain in force for only a specific period or term. No death benefit is payable if the insured dies after the term expires. The term could either reference a specific number of years such as 10, 20, 30 years or a specific age such as term to age 65 or term to age 70. 

Whole life or Permanent insurance 

Whole life insurance is designed to remain in force for the whole life of an insured and the premiums will never increase. The purpose of level premiums with whole life policies is to make life coverage affordable at an older age. The insured overpays when they are young and underpay when they are elderly. Cash value is a part of whole life insurance and reflects the reserves necessary to ensure payment of guaranteed death benefit. The cash value increases steadily over time, over the life of the contract because it is regularly credited with a guaranteed level rate of interest. 

Life insurance, at its simplest, is designed to protect loved ones from a financial disaster e.g., the loss of the bread earner. Life insurance when utilized to its full potential is a vital tool that can secure financial growth and accelerate financial success. Life insurance is legacy creation! One simple tool can ensure that the next generation of your family has the financial freedom to ensure success for generations to come

Long-term Care Insurance: The Missing Piece of Your Estate Plan

If you wanted to cross a bridge and someone told you that the bridge had a 70% chance of collapsing, would you cross it? No. You are a reasonable person, and you would create an alternative plan to reach your destination. Unfortunately, you face the same odds for a similarly catastrophic event and most have not prepared for it. 

If you are over the age of 65, you have a 70% chance of needing some sort of long-term care—whether it’s in home, assisted living, or skilled nursing level care. If you do end up needing long-term care (LTC), which you likely will, you’ll need to figure out how you’re going to pay for it. You may receive Medicare and a Medicare supplement but that will not cover the cost of LTC. Medicare will only cover up to 80 days of care but only if you are improving. If your progress hits a plateau, you will need to find an alternative means of paying. 

LTC can be extremely expensive. Depending on the level of care, you can expect to pay anywhere from $5,000 to $10,000 a month or more. Most do not have the cash on hand to pay out that kind of money for the long-term. If you do end up paying out of pocket, you will likely need to liquidate your assets (home, care, retirement accounts, and investments) to cover the bill. Paying out of pocket, for most, means that they will not be leaving anything for their loved ones when they die. Everything they own goes to cover the cost of care. 

Luckily, there are alternatives out there. Medicaid is one alternative which I have written about at length in other articles. Medicaid may be a viable and beneficial option for you. Check out my other articles to learn more. 

Another alternative is long-term care insurance. LTC insurance is much like life insurance, car insurance, or any other type of insurance in that you pay monthly premiums, and, upon the occurrence of a triggering event, the policy pays out. For car insurance, the triggering event is a wreck. For life insurance, it is the death of the insured. For LTC insurance, it’s the need for long-term care. 

LTC insurance premiums do present a monthly obligation. They can cost anywhere between $1700 to $2300 per year. However, that amount pales in comparison to the cost of LTC out of pocket. With LTC insurance, you will pay, in a year, less than half of what you’d pay in a month without the policy. 

Another benefit is the variety of policies available. This allows you to pick the plan that will ensure a return on your investment. For example, some LTC insurance policies have a chronic care rider. This means that the policy will pay out if you have the need for care beyond what Medicare will pay for but not to the level where you need assisted living or nursing home care. Thus, even if you are a part of the lucky minority who never needs LTC, LTC insurance can still benefit you. 

Protect your Life Insurance

There are certain assets you’re allowed to have and still qualify for LTC benefits through Medicaid. Life insurance is one of the assets that Medicaid specifically looks for when assessing someone’s asset level. 

Life insurance can be broken into two broad categories: term and whole. Whole life insurance retains a value, which builds over time as premiums are paid. Term, on the other hand, typically does not have an intrinsic value that builds as premiums are paid. The value that builds when premiums are paid is called a “cash value,” the value that the policy would have if cashed out. “Face value” is the value of the policy’s death benefit. 

Term life insurance does not count as an asset for Medicaid.[1] Whole life insurance does count. Medicaid allows individuals going into assisted living[2] to have a policy with a value up to five thousand dollars. For those folks going into a nursing home, they can have up to ten thousand dollars face value. Medicaid cares about the face value instead of the cash value because the cash value increases with each premium paid. Ostensibly, the cash out value could conceivably equal the face value if the policy is kept long enough. 

Obviously, a whole life insurance policy can easily have a face value that exceeds ten thousand dollars. In fact, many individuals rely on their life insurance policy to provide a comfortable inheritance for their loved ones. If you’re one of those individuals, you don’t want to cash the policy out. Even if you can save the cash value, you’d be surrendering the death benefit—which would likely greatly exceed the cash value.  

Some individuals come to a point where they are forced to cash out their policy to qualify for long-term care benefits. Because the cost of care can greatly exceed the death benefit, and because the client may need to cash in the policy to pay for care, life insurance can fall victim to the long-term care crisis just like any other asset. Thus, you want to plan to protect the life insurance from the outset. 

Life Insurance Trust

A trust can be a great tool to protect life insurance. The idea behind the life insurance trust is to preserve the life insurance but take it out of the client’s name. Therefore, the life insurance is no longer counted as an asset for Medicaid purposes. 

The life insurance trust is an irrevocable trust. As such, the policy would be owned by the trust and not the client. This arrangement is especially attractive for life insurance since it is not something that a client would typically need to access. Accordingly, it is different from putting, for example, a bank account in an irrevocable trust. Such bank account is used by the client on a daily basis, whereas life insurance just sits there until the insured dies. 

Because this is such a useful arrangement, any life whole insurance policy worth more than ten thousand dollars should be placed into a life insurance trust[3]. This is especially true considering that the transfer of the life insurance to the trust implicates the lookback period. Therefore, the sooner it is done, the better. 

Brenton Begley

Estate Planning & Elder Law Attorney