Have you ever seen an advertisement for long-term care insurance? Probably not. There are ads for every other type of insurance, but none for long-term care insurance. Does that mean long-term care insurance isn’t worth buying? Is it more important to have than life insurance?
Jump ahead to these sections:
- Overview: Life Insurance vs. Long-Term Care Insurance
- Purpose: Life Insurance vs. Long-Term Care Insurance
- Life Insurance vs. Long-Term Care Insurance: Payouts or Payment Schedule
- Life Insurance vs. Long-Term Care Insurance: Costs
- Pros and Cons of Life Insurance and Long-Term Care Insurance
- Should You Get Life Insurance, Long-Term Care Insurance, Both, or Neither?
- Hybrid Long-Term Care Insurance
This article will be taking a look at both long-term care insurance and life insurance: what their purpose is, how they pay out benefits, who they’re for, their pros and cons, and if either, neither, or both are worth getting.
When we’re finished, we’ll look at a solution that can meet your needs for both types of insurance—if you really need both.
Overview: Life Insurance vs. Long-Term Care Insurance
Life insurance is a financial product that has protected people financially since 1706. The first company to offer life insurance, the Amicable Society for a Perpetual Assurance Office, was founded in London and is no longer in business, but there is no shortage of companies selling life insurance in the 21st century.
The first American insurance company was called the Philadelphia Contributionship; Benjamin Franklin organized it in 1752. Top U.S. life insurers bring in billions of dollars in revenue each year while paying out a relatively small percentage for death claims.
Life insurance is very straightforward: you and the life insurance company sign a contract agreeing that your beneficiaries will receive a specified sum of money if you die while the life insurance policy is still in force. The contract has many terms and conditions, but the insurer is legally obligated to pay if all of the information you provided in the application was truthful and accurate and your policy is paid up-to-date.
The primary purpose of life insurance is to replace your income if you die with others being dependent on you financially. The average American household is a two-income family, and the permanent loss of one of those incomes could be financially devastating to the other income contributor and anyone else living in that household.
Long-term care insurance is not designed to pay someone else when you die (if you’re the insured); it’s designed to pay benefits to you while you’re alive. It’s primarily used to pay for you to live and receive care at an assisted living facility or nursing home, and it also pays benefits for home health care.
The total dollar amount of the benefits you receive will depend on two factors:
- The daily benefit amount you select
- The number of years you choose to receive that benefit
Purpose: Life Insurance vs. Long-Term Care Insurance
People buy life insurance because they care more about someone else than they do the money they spend on premiums. They want to make sure that surviving family members can stay in their home, the kids can go to college, and the surviving spouse or partner can continue to live the lifestyle they’re accustomed to.
People buy long-term care insurance when they’re younger and want to make sure their living situation will be adequate when they’re older. Food, clothing, and shelter are their main concerns, and long-term care insurance provides them with the security of knowing they’ll be comfortable later in life.
Without long-term care insurance, people needing assistance with daily living must rely on Medicare once they’ve spent down all of their liquid assets and sold any real estate they own, like a home. Medicare facilities are not considered as desirable a place to spend your final years compared to a private facility paid for by long-term care insurance.
Life Insurance vs. Long-Term Care Insurance: Payouts or Payment Schedule
A life insurance payout is typically made in a lump sum to a beneficiary named in the policy. The amount paid out will be the amount chosen by the owner of the policy. It could be the original face amount of the policy only, or it could include additional increments of life insurance protection bought after the original policy was issued.
In rare instances, beneficiaries will receive the death benefit in monthly installments instead of the lump sum payout. This is done to prevent the beneficiary from spending the payout irresponsibly because of age or a lack of financial knowledge.
Long-term care insurance payouts are made monthly, and the amount of the payout will depend on the two factors mentioned earlier: the amount of the daily benefit and the time frame the insured selected.
For example, let’s say you selected a daily benefit of $300 for up to ten years, and shortly after taking out the policy, you stay in an assisted living facility for thirty days. The total payout for that particular stay would be $9,000. You would still have thousands of dollars more to collect over the remaining years of your policy.
Life Insurance vs. Long-Term Care Insurance: Costs
Many factors determine the cost of each type of policy. Life insurance companies consider age, gender, smoker or non-smoker status, pre-existing conditions, type of policy, and the face amount of the policy.
The cost of long-term care insurance is based on some of the same factors as life insurance, like age and gender, but also on the policy’s daily benefit amount and the number of years the benefit will be paid out.
You may have noticed that long-term care insurance providers don’t factor in an applicant’s pre-existing condition. The reason for that: when you apply for long-term care insurance, with most companies, you are either accepted or you’re not, whereas with life insurance, you can still be issued a policy if you have certain pre-existing conditions and you’re willing to pay higher-than-standard rates for your policy.
Another difference between long-term care insurance and permanent life insurance, particularly whole life insurance, is that whole life premiums never increase, and long-term care insurance premiums can, and often do, change.
Pros and Cons of Life Insurance and Long-Term Care Insurance
When we look at the pros and cons of life insurance, we have to consider if we’re talking about term life insurance or permanent life insurance (explained above).
Since the type of life insurance most financial planners recommend and that most people buy is term life, let’s look at its pros and cons.
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Term life insurance pros
- The premiums are lower when you’re younger.
- You can buy a large face amount because of the lower premiums.
- Term life insurance can be converted to permanent insurance.
Term life insurance cons
- It’s temporary coverage.
- You must re-qualify at the end of the term.
- It’s hard to qualify if you have/had significant health issues.
- Premiums go up every time you start a new term.
- The policy accumulates no cash value.
Long-term care insurance pros
- It provides peace of mind.
- You’re likely to need it and use it (according to an article in the Wall Street Journal, 69% of people age 65 and older will require long-term care).
- Out-of-pocket costs for long-term care can be very expensive without long-term care insurance.
Long-term care insurance cons
- There’s no certainty in pricing—insurers can raise premiums at any time.
- It’s challenging to figure out how much insurance you might need.
- Collecting benefits can be cumbersome.
- It’s difficult to qualify for long-term care insurance.
As you can see, the pros and cons are pretty balanced for both products. Whether one outweighs the other will depend on your circumstances.
Should You Get Life Insurance, Long-Term Care Insurance, Both, or Neither?
The answer to this question is: “It depends.”
For example, a 30-year-old who’s married with kids needs life insurance but shouldn’t buy long-term care insurance just yet because the probability of needing it is too far in the future. But a 45-year-old individual, also married with kids, should own both types of insurance before the long-term care premiums become too expensive.
Someone who needs neither life insurance nor long-term care insurance would be someone in their 20s with no dependents. They don’t need life insurance because the loss of their income due to death wouldn’t negatively impact anyone, and they don’t need long-term care insurance yet because of their young age.
Hybrid Long-Term Care Insurance
If you decide that you’d like to have both types of coverage—life insurance and long-term care insurance—a hybrid long-term care insurance policy may suit you perfectly.
These policies not only provide the benefit of paying your long-term care expenses, but they also pay out a death benefit if you die while the policy is in force. And the premium is guaranteed to remain constant, which long-term care insurance doesn’t guarantee by itself.
Some hybrid policies have a rider that allows you to get a 100% refund of your premiums if you want, starting six years after you purchase the policy. They also allow you to purchase additional coverage to protect against inflation.
The death benefit can help pay for funeral expenses and other vital needs. The long-term care benefit can keep you comfortable as you age. It’s a nice combination, but it’s not inexpensive. The life insurance portion of the policy is permanent life insurance, which is costlier than term life insurance, and long-term care insurance, depending on your age, is also expensive.
Don’t Wait If You Need Coverage
When you apply for coverage, premiums for life insurance and long-term care insurance increase with every birthday. And you might not qualify for coverage if you’ve developed pre-existing medical conditions as you get older.
The best time to apply for coverage is when you decide you want the coverage, can afford the coverage, and still qualify medically for the coverage. Many people have regretted putting off buying insurance after they found out that they waited too long.