What’s a Long-Term Care Rider for Life Insurance?

Updated

If you’ve ever had a loved one spend time in a nursing home, you might be asking yourself if you’ll ever share the same fate. Being moved from the comfort of your personal residence to a facility like a nursing home is a dreaded scenario for most people.

But if it’s such a concern, why do so few people buy long-term care insurance? According to Consumer Affairs, about 70% of Americans will require long-term care at some point in their lives, yet only 7% of us own a long-term care insurance policy. 

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There are several reasons for this, one of which is the high cost of long-term care insurance. Consumer Affairs reports that for the average 55-year-old female, long-term care insurance premiums cost $2,650 per year. This is due largely to the estimated cost for long-term care during the last five years of life being anywhere from $233,000 to $367,000.

Another reason long-term care insurance has been priced out of the reach of many Americans is the high cost of claims for insurance companies. Insurers have had difficulty reaching their profit targets with long-term care insurance policies because of the size of the claims they pay out compared to the amount of premiums they receive.

All of this paints a pretty bleak picture if you’re concerned about paying for long-term care insurance for you or a loved one. However, insurance companies have developed an answer that many people have found more affordable than buying a standalone long-term care policy: the long-term care rider for life insurance.

What Is a Long-Term Care Rider for Life Insurance?

Instead of buying a separate long-term care insurance policy, many people have added a long-term care rider to their life insurance policy.

A long-term care (LTC) rider is a feature of a life insurance policy that allows you to receive a portion of your policy’s death benefit while you’re still alive. The money you receive from your policy can then be used to pay for long-term care expenses. 

LTC riders for life insurance are typically only available on permanent life insurance policies, such as whole or universal life insurance. You’ll rarely find a life insurance company that offers this rider on its term life insurance policies. 

How Do Long-Term Care Riders for Life Insurance Work?

Long-term care riders are often referred to as a “living benefit” of a life insurance policy because you, the insured, realize a benefit from having the policy while you’re alive, instead of the usual scenario where only your beneficiaries benefit from the policy after you die,

To activate the LTC rider and access the death benefit, your doctor needs to diagnose you with a chronic illness. Examples of chronic illnesses include:

  • Alzheimer’s disease
  • Arthritis
  • Asthma
  • Cancer
  • Crohn’s disease
  • Cystic fibrosis
  • Diabetes
  • Epilepsy
  • Heart disease
  • HIV/AIDS
  • Mood disorders
  • Multiple sclerosis (MS)

Many other diseases can be classified as a chronic illnesses, but it’s up to your insurance company to approve your claim and decide if your situation meets its criteria for activating your policy’s LTC rider.

Not only must you have a licensed health care professional certify that you have a chronic illness, but they also must attest that your illness restricts you from performing at least two of these “activities of daily living (ADLs),” which include:

  • Bathing
  • Dressing
  • Eating
  • Toileting (performing personal hygiene functions)
  • Transferring (getting in and out of a bed or chair without assistance)
  • Maintaining continence

Your insurance company won’t pay out any of your LTC rider benefits until you’ve exhibited impairment for 90 days, which is known as the “elimination period.” 

By not being able to complete ADLs, you will receive benefits to pay for the care you require to complete them either at home or at a long-term care facility.

Most insurers cap the amount of a life insurance policy’s death benefit that’s available for long-term care benefits at 70% to 80% of the death benefit. So if you own a $300,000 life insurance policy, the maximum amount you’ll be able to receive from the LTC rider is $240,000 if your life insurer allows an 80% benefit.

LTC rider benefits are usually paid in one of two ways: a monthly payment or a lump-sum payment. Most people prefer the lump-sum payment because once the insurance company issues you the check, you’re free to spend the money however you wish on medical or living expenses.

Receiving your benefit payment monthly requires more effort on your part compared to a lump-sum payout. The monthly payout makes it necessary for you to keep accurate records of all the long-term care costs you incur during the month and then submit the receipts to the insurer for payment.

Some companies allow you to choose your preferred payout method, but some don’t. Make sure you ask your insurance agent what the terms of your LTC rider are before you complete an application.

Keep in mind that a long-term care rider on a life insurance policy isn’t meant for comprehensive care. It does cover the cost of assisted living and home health care, but it doesn’t pay for doctor’s visits, surgeries, prescriptions, or many other services typically covered by Medicaid or health insurance.  

How Much Does a Long-Term Care Rider Cost?

Like all riders you can add to your life insurance policy, an LTC rider’s cost will vary by insurer. Most riders can be added to a policy for a flat fee, but long-term care riders are priced as a standalone product. This tends to make LTC riders the most expensive riders you can add to your policy, and they can add more than $600 to $800 per year to your life insurance premium

When is Purchasing a Long-Term Care Rider Worth It?

Though the answer to this question is primarily subjective, most financial planners would agree that some form of financial protection against long-term care costs is vital. 

According to Genworth’s Cost of Care Survey, every day until 2030, 10,000 Baby Boomers will turn 65, and 70% of people will require long-term care during their lifetime. The cost of that care continues to rise, with the monthly median cost of a private room in a nursing home facility in 2021 being $9,034.

One advantage of having an LTC rider on a life insurance policy is that you’re locking in your premiums for life. Standalone long-term care policies can have rate increases at the insurance company's discretion, subject to state regulatory approval, whereas LTC riders never increase in price.

Whether or not a long-term care rider on a life insurance policy is the best way for you to protect yourself against long-term care expenses is debatable; your individual circumstances will determine that after looking at the alternatives to a long-term care rider.

A life insurance policy with a long-term care rider should not be the only life insurance policy you own if you have other specific financial needs, such as paying off a mortgage or funding college tuition when you die. Instead, a separate policy to meet these needs is advisable, and many financial advisors recommend a term life insurance policy as an inexpensive option.

Are There Any Alternatives to Long-Term Care Riders That Provide Similar Benefits?

If having comprehensive long-term care coverage is important to you, but you don’t want to reduce the death benefit of your life insurance policy, you have several options. One of those options is to buy a standalone long-term care insurance policy. 

A standalone LTC policy is going to provide you with much more comprehensive coverage than a long-term care rider on a life insurance policy does. In addition to covering home health care, assisted living facility care, and nursing home care, an LTC policy may also cover the cost of professional nursing care, occupational therapy, or rehabilitation. 

In addition to all of its other benefits, a standalone long-term care policy can also cover short-term hospice care for terminally ill individuals. Hospice care helps people with pain management, provides emotional and physical support for everyone involved, and is an integral part of end-of-life planning.

Most LTC policies allow insureds to receive care at a hospice facility, nursing home, or in the comfort of their own home. However, many services classified as “hospice care” are not considered long-term care and are covered under Medicare. 

It should be noted that as attractive as standalone LTC policies appear, if you have a pre-existing condition, you may not be eligible for coverage during the “exclusion period,” which can last for several months after you purchase your policy. 

Long-term care insurance is an expensive alternative. According to the American Association for Long-Term Care Insurance (AALTCI), a couple in their mid-50s will pay around $3,000 per year for a new LTC policy.

The factors that determine the cost of a standalone long-term care policy are:

  • The policyholder’s age
  • The maximum dollar amount the policy will payout per year
  • The maximum number of days the policy will pay
  • The lifetime maximum dollar amount the policy will pay
  • The cost of any riders added to the policy

A second option to consider is a chronic illness accelerated death benefit rider. Similar to a long-term care rider for a life insurance policy, this rider is also added to a life insurance policy, and a portion of the policy’s death benefit is paid out while the insured is alive if they can’t perform two activities of daily living. 

However, while an LTC rider will pay out for a temporary disability, the chronic illness rider will only pay out if a medical professional certifies that the disability is permanent. 

LTC Riders and Policies: Difficult to Qualify For 

The statistics we’ve looked at in this article show that it can’t be denied that you stand a very good chance of needing long-term care someday. What we can’t see is how hard it is to qualify for an LTC rider or standalone policy. 

Insurance companies have always been among the most profitable businesses globally because they know how to assess risk and price their products accordingly. Experience has shown them that long-term care riders and policies are not among their most profitable products because of how costly claims are. This causes them to be much more conservative with their underwriting and negatively impacts your chances of being approved when you apply for coverage.  

A Friendly Word of Advice 

If you want to be protected by either an LTC rider or standalone LTC policy, apply as soon as possible. The best time to buy a life insurance or long-term care policy is when you’re young and healthy. Don’t delay purchasing coverage today that will provide you important benefits in the future. 

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