What Happens to Unused Long-Term Care Insurance?


Just about everyone who buys long-term care insurance hopes it’s an insurance policy they’ll never use during their lifetime. Long-term care conjures up images of being bed-ridden, having a roommate you don’t know, and losing your independence. 

Jump ahead to these sections:

But the chances are good that you’ll need long-term care sometime after you turn 65. The Wall Street Journal researched long-term care and found that 69% of people over age 65 will require long-term care at some point during their lives. 

But not to be forgotten are the 31% that will never see a benefit from their long-term care insurance policy. They’ll spend thousands of dollars in premiums to protect against a life event they’ll never experience. Let’s look at what happens to them.

What Happens If You Don’t Use Long-Term Care Insurance?

Throughout your life, you’ll have spent tens of thousands of dollars on automobile insurance. Some drivers with insurance seem to have recurrent fender benders, while others never file a claim the entire time they’re insured. 

Can those fortunate drivers with squeaky-clean driving records contact their auto insurer and ask for a refund of the premiums they paid when they’ve stopped driving? They can ask, but unfortunately, they’ll be told “no refunds.”

But that’s not the case with all long-term care insurance policies. Many policies now offer the return of premiums in the form of a tax-free death benefit paid to their named beneficiary. Most of these policies return not only the premiums paid, but also have a death benefit that is higher than the premiums paid.

Why would a long-term care insurance carrier give your money back if you never received a benefit? After all, your auto or homeowners insurance carrier won’t. The reason they can do this is they’ve had the use of your money to invest during the years you paid your premiums, and any investment gain is all theirs. 

When you purchase your long-term care insurance policy, the insurer will give you three options concerning return of premium:

  • Full return of premium: This option entitles your beneficiary to receive a death benefit equal to the total sum of your premiums paid while you were living. Since it provides the most considerable benefit of all three options, it’s also the most expensive.
  • Return of premium less claims: This option provides you with a refund of unused premiums. For example, if you paid $30,000 in premiums but were issued $10,000 in claims payments before dying, your beneficiary would receive a check for $20,000 of unused premiums.
  • Graded return of premium: This option is the least expensive of the three. Your return of premium benefit decreases over a period of time and then is no longer in effect. For example, your insurer might offer return of premium benefits up to age 75; then, it drops to zero.
» MORE: You need more than a will. Start here.

Can You Cash Out Long-Term Care Insurance?

Some companies will let you “surrender” your policy while you’re alive. Many long-term care policies with a life insurance component (hybrid long-term care insurance policies) will provide a full return of premium between years one and five. This is a very nice benefit; however, it can generate a tax bill (consult with your tax professional on this).

Tips for Buying and Making the Most of Your Long-Term Care Insurance

Not all that many years from now, many baby boomers will need help with some of the activities of daily living, such as bathing, dressing, eating, or remembering to take their medication. Some will have already purchased long-term care insurance, while others are young enough that they’re still shopping for a policy.

Here are some tips to help you find affordable coverage and get the maximum benefit from your policy.

» MORE: Planning doesn't have to be complicated or expensive. Join the peace of mind movement.

Tip 1: Keep it affordable, so you don’t let your policy lapse

Many people experience sticker shock when they’re quoted long-term care insurance rates. As a result, some give up and never buy a policy. Others procrastinate. Only a percentage become policy owners. 

If you’re tempted to give up on long-term care insurance because of price, or you’re delaying your decision because it’s expensive, here are some ways you can keep the cost of a policy affordable.

Buy sooner, not later

Most companies will issue policies to people age 75 and under, but you may have developed health conditions at that age, and the rates will be incredibly high. Buying a policy at age 50 while you’re in good health is the ideal time to shop and purchase coverage.

Work with an independent agent

Two types of agents sell long-term care insurance: captive agents and independent agents. Captive agents represent only one insurance company, so you’re going to have a limited number of policies to choose from. Policies from insurance companies with captive agents also tend to be more expensive because of the expense of having agents on their payroll.

Independent insurance agents represent many different insurance companies, so they’re able to show you a variety of policies. You’ll be able to choose one that best meets your needs. Insurers who work through independent agents typically offer more affordable policies than those from companies with captive agents.

Have a realistic budget

When you see long-term care insurance policies with all of the bells and whistles, you’re probably going to want to buy on the spot. But you might end up with a premium payment that you can’t consistently pay. The result a lapsed policy and a bad experience with long-term care insurance.

Know what your budgeted monthly amount for long-term care insurance is before you shop. When told the amount you can spend each month on the policy, an experienced agent will structure the policy benefits to stay within your budget.

Buy a basic policy

Yes, that return of premium feature is desirable, but it will also cost you thousands of dollars more per year in premiums. A “restoration of benefits” rider with full benefits restored after you file a claim is also a nice-to-have, but it’s a rarely used feature since once people begin using their benefits, they usually continue. A policy with basic benefits will usually be more than adequate.

Tip 2: Know and use your benefits

Many long-term care insurance policies end up alongside the life insurance policies in a strongbox or bottom desk drawer, never to be looked at again. When you get your actual policy, review it with your agent and provide a copy of it to someone who will help you when it’s time to use your benefits.

For example, some long-term care insurance policy owners pay substantial premiums every month and think they only have coverage for nursing homes. What they don’t know or remember is that long-term care policies also provide coverage for things like:

» MORE: Planning a funeral? Get access to discounts in minutes.

Tip 3: Be aware of exclusions and waiting periods

It’s also important to know that if you have a pre-existing medical condition when issued your policy, there could be an exclusion period during which you’re not eligible for long-term care benefits. These exclusion periods can last for several months after your policy is issued.

How to Pay for Long-Term Care if You Don’t Qualify for Long-Term Care Insurance Coverage 

If you have any pre-existing conditions or major illnesses like cancer or heart disease, insurance companies could decline to issue you long-term care insurance coverage. If that’s the case, remember that you have Medicaid benefits to help you pay for long-term care in the future.

However, there is one BIG “but” about using Medicaid: you’ll first have to spend all of the money you have and even sell your home before you’ll qualify for Medicaid benefits. That means spending your retirement savings, emptying your bank accounts, and liquidating your investments. 

That’s an unfortunate scenario, but it does drive home the point that you should buy long-term care insurance while you’re younger and healthier. If you’re age 50 or over and don’t have long-term care coverage, call an independent agent today.

Bottom Line

You won’t see advertisements for long-term care insurance; it’s not an insurance company’s most profitable product. Your friends won’t be talking to you about long-term care insurance they just applied for, and your doctor isn’t going to tell you about your need for long-term care insurance.

If you want to buy long-term care insurance, you’re going to have to initiate the process. There are plenty of online resources to help you locate companies and agents that will help you find the right policy. So make the first moveyou’ll thank yourself someday in the future.

Icons sourced from FlatIcon.