How life insurance riders can pay for long-term care

Since companies introduced long-term care insurance in the mid-1960s, the biggest objection from prospective buyers has been paying for coverage they may never use. In response, insurance companies began introducing products that combined long-term care benefits with life insurance.

Today, life insurance policies with long-term care riders are more popular than standalone long-term care (LTC) insurance policies. It wasn’t that long ago that combination policies made up a small portion of the market with most people buying standalone policies. However, as of 2020, 7.5 million Americans have purchased some form of long-term care insurance, according to data from the American Association for Long-Term Care Insurance (AALTCI).

Combination plans are finding a niche among high-income baby boomers and even the members of Generation X looking for a way to shield their retirement portfolios against the risk of long-term care expenses.

Life insurance with long-term care benefits offers additional protection

Demographics are among the factors driving interest in combination policies, says Michael Hamilton, vice president of MoneyGuard Solutions at Lincoln Financial Group. Many people interested in combining long-term care benefits have seen their parents go through long-term care without a good solution in place.

Today’s products are simpler and provide more flexible options than their predecessors, which were simply life insurance policies with accelerated riders tacked on to let policyholders use some of their death benefits for long-term care expenses, Hamilton says.

Underwriting has been simplified, too. The process is quicker than for life insurance or standalone long-term care coverage, Hamilton says. The insurer may just need to review your medical history and conduct a telephone interview. No medical exam or lab work may be required.

One drawback of combination policies is that you typically need a large amount of money for a lump sum. For that reason, combination policies mainly appeal to people with enough money to self-fund their long-term care needs but want some protection for their assets. Any money used for long-term care will get reduced from the policy’s death benefit.

The economy is another motivating factor for buyers, says Peter Gelbwaks,  chairman emeritus of the National LTC Network and a founding member of Gelbwaks Executive Marketing Corp. in Plantation, Florida. Investors are looking for safe alternatives to the volatile stock market and ultra low-rate CDs and money market accounts. Combination products offer a place to stash cash with the choice of a payoff for beneficiaries, protection against long-term care costs or money back.

But these policies aren’t for everybody. “They can be considerably more expensive than buying a traditional long-term care insurance policy and investing the rest,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. According to the organization’s 2023 Long-Term Care Insurance Price Index, a 55-year old male could pay $900 a year for traditional long-term care coverage. A comparable linked benefit policy would cost $3,950.

“It’s a product that serves a very special niche,” he says.

Combination vs. standalone long-term care insurance

Which one is better for you? Choosing between a combination or standalone policy depends on your circumstances. Slome says many people who buy combination policies spend just enough to give themselves two to three years of long-term care benefits.

“If you never need long-term care before you die, you’ll be glad you picked the linked product because your heirs will get some benefit,” he says. “But if you do need long-term care, and that care goes on for more than three years, you’ll regret you didn’t buy a traditional long-term care insurance policy.”

The AALTCI said a combination plan could be right for you if you have disposable income or “lazy money” sitting in low- or no-interest accounts. At that point, it could make sense to put that cash into a combination plan, so you’re protected by life insurance with an LTC component.

“But comparison shop because these products vary and several insurers have recently reduced the costs, meaning you can now get significantly more coverage for less money,” Slome says.

Now, let’s look at the difference in costs. Stand-alone long-term care insurance rates vary depending on applicants’ ages and conditions, levels of benefits and the company. The AALTCI said the average LTC rate for a single male aged 55 is about $950 annually; for a single female, it’s $1,500. The average LTC rate for a couple both age 55 is $2,080 combined.

Meanwhile, the cost for a combination policy requires a large up-front payment.

A word of warning — the AALTCI said there are large differences between the costs of combination plans. For instance, a policy that requires a $100,000 lump sum payment may pay out an $8,000 monthly long-term care benefit and death benefit of $200,000. Another might give you a monthly $6,200 long-term care benefit and $150,000 death benefit.

Here is a real comparison of two policies from two leading insurance companies, from the AALTCI. Coverage is for a married female, age 65. The initial policy requires a $100,000 single payment.

Policy A would pay a Death Benefit of $193,906.
Policy A would pay a monthly long term care benefit of $8,079.

Policy B would pay a Death Benefit of $150,121.
Policy B would pay a monthly long term care benefit of $6,255.

Policy C would pay a Death Benefit of $165,997.
Policy C would pay a monthly long term care benefit of $5,533.

What all this means is that you should shop around when buying an insurance policy. One company may provide better rates for your specific situation. A good place to start is Insure.com’s Best Life Insurance Companies.

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