Should you buy life insurance with a long-term care rider?

The majority of Americans will need long-term services and support in their lifetime, according to the U.S. Department of Health and Human Services. And it can be expensive: The annual cost for nursing home care can be in the six-figure range. The need for long-term support is expected to increase significantly in the coming years due to the aging population, and costs are likely to rise as well.

What is long-term care?

Long-term care refers to the assistance people receive with activities of daily living, or ADLs, due to illness, injury or cognitive impairment. These include bathing, dressing, eating, transferring, for example getting out of bed or a chair, and toileting. Long-term care can be provided at home, in an assisted living facility or in a nursing home.

Long-term care insurance is a type of insurance policy that provides a stated benefit to cover the expenses associated with long-term care. People who own these policies can typically claim the benefit once they have a proven inability to perform a certain number of ADLs.

A long-term care rider on a life insurance policy is a feature that helps cover long-term care expenses if you become chronically ill or unable to perform ADLs. This is an alternative to owning a standalone long-term care insurance policy.

Life insurance with a long-term care rider

Long-term care riders are usually attached to whole life, universal life or other permanent life insurance policies. Generally, when long-term care riders pay for long-term care expenses, your policy's death benefit is reduced dollar for dollar. Upon your death, the remaining portion of the death benefit that was not used to pay long-term care benefits will be paid, generally on a tax-favored basis, to your beneficiaries.

Here's a breakdown.

Eligibility: To qualify for the benefit, you must meet the criteria specified in the rider. That may include being unable to perform a certain number of ADLs or being diagnosed with a qualifying chronic illness, as defined by the life insurance company.

Benefit amount: The rider specifies a percentage or a specific dollar amount of your policy's death benefit that can be used for long-term care expenses. Let's say the insurance company pays a death benefit of $500,000 and the rider provides a 50% accelerated death benefit for long-term care. That means you may be able to access up to $250,000 for long-term care expenses.

Benefit payout options: The rider may offer different benefit payout options, such as a lump sum or periodic payments, to cover the long-term care expenses. You can typically choose the option that best suits your needs.

Impact on death benefit: The long-term care benefit payout is typically subtracted from the policy's death benefit. For example, if you access $250,000 for long-term care expenses from a $500,000 policy, the remaining death benefit for your family would be $250,000.

Premiums: The rider may require additional premiums to be paid in addition to the base premiums of the underlying life insurance policy. These premiums can vary depending on your age, health and other factors. Before you decide to add a long-term care rider, be sure to consider any additional premiums.

Limitations and exclusions: Limitations, exclusions, waiting periods and other conditions may impact the availability and use of your long-term care rider. Be sure you've carefully reviewed and understand these terms to ensure they align with your expectations and needs.

The specifics of long-term care riders vary depending on the insurance provider and the policy. Consider consulting with a qualified insurance professional, who can help you understand how the rider works and how it may fit into your overall financial and estate-planning strategy.

When is it beneficial to combine life insurance with a long-term care rider?

When you weigh the option of buying life insurance with a long-term care rider, the most important factor to consider is need. Do you need both life insurance coverage and long-term care? If so, here are four considerations to keep in mind.

1. You get a dual benefit. If you need long-term care, the rider allows you to access a portion of the death benefit to pay for those costs. If you die without needing long-term care, the policy still pays out a death benefit to your beneficiaries. It offers comprehensive coverage for both scenarios, providing peace of mind for you and your loved ones. Keep in mind that use of the long-term care benefit may reduce the available death benefit.
2.  It could be a more cost-effective alternative for securing both life insurance and long-term care coverage. Long-term care insurance can be expensive and premiums can increase over time. Buying life insurance with a long-term care rider may be more affordable than owning two independent policies. Life insurance policy premiums also tend to be more stable and predictable. Plus, the policy can build cash value over time, which can be used for other needs, including offsetting future premiums.
3. You have some flexibility in how benefits can be used. Life insurance policies with long-term care riders often allow you to use the benefits to pay for various long-term care services, including home care, assisted living and nursing home care. Because you have more control over how the benefits are used, you're free to choose the type of care that best suits your needs. Be sure to check the fine print before purchasing to understand how your policy works.
4. You can protect against the financial risks associated with long-term care. Long-term care costs can quickly deplete your savings and retirement funds. If you have a policy with a long-term care rider, you can help protect against the financial risks associated with long-term care. It can also provide a safety net and help ensure your assets are preserved for their intended purpose, such as passing them on to beneficiaries or supporting legacy desires.

In summary, life insurance with a long-term care rider can be a valuable option if you're looking for comprehensive coverage for both life insurance and long-term care needs.

Planning and being proactive about long-term care needs can help you take thoughtful steps in securing your future and protecting your loved ones. As with any insurance decision, carefully review your individual needs and financial situation, and consult with a qualified insurance professional to determine if this coverage is suitable for you.