We’ve made a list of the creative and unique ways you can leverage a life insurance policy to pay for long-term care costs.
Change the way you think about life insurance.
There are some unique and incredibly innovative ways to leverage a life insurance policy today, particularly for use in paying for long-term care costs. Most people aren’t aware of these interesting methods, and some are pretty new! We’ve gathered together some of these while working in this area and wanted to share with families more broadly.
Most of us think of life insurance in terms of a death benefit. We pay an agreed amount of money at agreed intervals so that the insurance company will pay, at death, an agreed sum of money to the beneficiary(ies) that we have identified. This is largely known.
What are some other ways to think about a life insurance policy?
Insurance policies can be thought about not just for the death benefit, but the cash held within it. It is reasonable to use the money within this insurance policy to pay for unexpected expenses, like those that pop up when caring for an elderly parent. It is also reasonable to tap into the policy while you are still living.
Timing is everything.
WHEN you acquire a policy or leverage one of these unique tactics is important. Generally, the younger you are, the cheaper your premium will be. Most people think about this. Considered less is the type of policy that makes the most sense at different stages of life and when each tactic for leveraging the cash within makes the most sense.
For those individuals or those caring for individuals that need long-term care NOW
Get a Line of Credit Backed by Your Policy, available through CareTrust Financial
How does borrowing up to 80% of your life insurance benefit at a competitive rate sound? Pretty attractive, right?! This is one of the newer, innovative tactics for funding long-term care for NO ADDITIONAL MONEY needed.
Proceeds are earmarked for care in a network of communities. You can borrow as little or as much as you need. You control how much of your life insurance goes toward care now, or inheritance later. Plus, proceeds from CareTrust are not taxable since they are incremental debt.
Once you have the line of credit you don’t have to worry about making payments. Payments are optional until a life insurance payout is made. The life insurance payout will cover your balance, and any remainder will be disbursed to your family.
What about the premium payments? They will fund premium payments until the policyholder’s passing. In doing so, they protect your inheritance.
Sell Your Life Insurance Policy
Life Settlement is the term for selling a life insurance policy for more than its surrender value, but less than its net death benefits, to a third party for a one-time cash payment. The new owner assumes the obligation to make premium payments and becomes the policy beneficiary. This practice effectively created a secondary market for life insurance policies.
For some people, the original need for the coverage has disappeared or has become greatly reduced, thus the elimination of the cost of the premium is the best idea. Here, the reason for considering life settlement of a policy is the emerging long-term care expenses. And this makes perfect sense - more cash for an asset no longer needed for its original purpose.
This can dramatically improve monthly net income. However, there are some tricky parts.
The cash value may disqualify you for Medicaid.
The cash value offered may not be the best deal for the owner of the policy.
This technique is definitely an oddity in the insurance industry and if you ask insurance professionals about this idea, many may provide a dim view on the practice. This is why there are professionals specifically committed to getting you the best price for your policy.
Our tip: Begin with some basic online education to learn more about Life Settlements.
Consider carefully the pros and cons against this tactic vs. the line of credit from CareTrust and which works best for your situation.
Dive Deeper
For those individuals of those caring for individuals that are close to needing long-term care
Single Premium Life Insurance Policy
These policies have a guaranteed minimum level of growth when all of its cost is paid for upfront. This type of policy is more liquid than more traditional versions. It is also a good way to shield assets when considering tapping into Medicaid benefits because it reduces cash without making a gift that would result in a penalty.
A single premium policy allows you to take annual withdrawals without penalty. You can also look into adding a rider that can guarantee, among other things, a full return of premium at any time.
To obtain, liquid assets are used to purchase a policy with low cash value or exchange a non-qualifying existing life insurance policy for such a special policy, resulting in a tax-free death benefit.
Our Tip: This strategy absolutely requires professional guidance. Naturally, you’re looking for a life insurance agent that is familiar with these kinds of policies, which happen to be taxed much like annuities. An online search for "Single Premium Life Insurance" will get you started.
Dive Deeper
For younger individuals (under 65 years old) that have a long time before they need long-term care
Whole life insurance with a long-term care rider
These newer hybrid products make great sense. You get life insurance AND long-term care insurance. These policies can often be acquired for relatively little money.
Fixed Annuity with long-term care benefits
Here you place assets into a fixed annuity. This has long been a key strategy for protecting money for later use and securing assets from Medicaid eligibility standards. With this product, if you need to use the annuity for long-term care expenses, you receive 2 to 3 x the annuity value to do so. If you have a $150,000 annuity, you could receive $300,000 or up to $450,000 for use on long-term care. The money spent on long-term care is federal income tax-free. And there are ways to protect the original annuity value so it is passed on to your beneficiaries.
A big challenge is convincing younger people that long-term care will be a part of their future. Let’s get clear about some things:
We are not talking about nursing homes. “Long-term care” is everything you need to live safely in your own home or in a community. Help with cooking, help getting dressed, help with chores, help getting to and from our appointments…these are things we will all need as we age. And this is long-term care. When we need help with these things we use family and friends, home care aides, home health, or even go to independent living or assisted living communities where it may be safer to age. Guess what? All those types of care costs money and they are NOT covered by Medicare.
You are going to live a long time. The very senior of seniors right now are already living well into their 90s. Those of us under 65 can expect a long late chapter of life. While there is every reason to believe that we can experience a healthy late chapter if we take good care of ourselves, the types of help described above are very real for most aged people. It is a near guarantee that home care or home health is the level of care needed for an 80+ year old person to continue to live safely and healthy in their home. So prepare for those costs.
We hope this has been an eye-opening resource on some really creative ways you can use life-products to pay for long-term care. Seniors and their caregivers alike are likely to benefit from knowing these options.
© 2023 Elder Care Solutions
If you’d like more financial options for covering long-term care costs, consider using our Elder Care Cost Analysis.