Should I Buy Life Insurance with a Long Term Care Rider?

The long-term care rider diverts part of your policy’s death benefit toward paying for your long-term care costs if you got sick or injured and needed rehabilitation.

Long-term care is expensive, and Medicare and health insurance typically won’t cover this cost.

This rider could be a lifesaver someday if you and your loved ones were struggling to pay for your care.

But this rider will also add extra money to your premiums, both now and for decades to come. And you may never even need it.

What Is a Long-term Care Rider?

Like any life insurance rider, a long-term care rider is an optional add-on that could make your life insurance policy more versatile later.

Specifically, you could access your insurance policy’s death benefit to use on health care costs while you’re still alive.

Long-term care riders fall into a special category of riders known as “living benefits.”

We call these riders “living benefits” because you could benefit from the rider while still alive.

Without a rider like this, your policy couldn’t pay out benefits until you died and your beneficiary filed a claim.

Since some people need long-term care year after year, it’s possible to spend tens of thousands on this kind of health care.

Too many Americans deplete their savings and retirement investments to pay for health care.

A long-term care rider on your life insurance policy is one of several ways to plan for health care costs later in life.

How Does A Long-Term Care Rider Work?

To use the long-term care benefits built into a life insurance policy with this rider, you’d have to meet a few requirements.

For example, you’d have to:

Buy the rider in advance

Unfortunately, you can’t wait until you need this additional coverage to add-on the rider.

You’d have to add the rider when you initially buy the policy.

Then you’d need to keep the policy current by paying its premiums which would include the cost of the rider.

Meet the ADL requirements

Before a life insurance company would let you exchange part of your death benefit for long-term care benefits you’d have to prove you actually need the benefit.

Your need for long-term care would be measured through your ability to perform the six activities of daily living (ADL):

Eating
Dressing yourself
Bathing yourself
Mobility
Toileting
Continence (bowel and bladder)

Showing the insurance company medical documentation that you can’t perform any two of these six activities of daily living means you could unlock the policy’s long-term care benefits.

File a claim for reimbursement or indemnity

Most insurers offer reimbursement riders which pay you back after you’ve already been billed for long-term care.

This is usually the cheapest type of long-term care rider.

But you can also find indemnity riders. These pay out a lump sum when you file a claim which gives you more freedom and flexibility.

For example, you could invest the lump sum yourself and then pull funds as needed.

Costs of a Long-term Care Rider

On average, you could expect to add $800 to $1,000 a year to your life insurance premiums.

Long-term care riders cost more than most other life insurance riders, such as a child term rider or waiver of premium rider.

Some riders come standard with most policies, such as the accelerated death benefit rider for use during a terminal illness.

But the long-term care rider isn’t standard. How much you’d pay depends a lot on the insurer and policy type you choose.

Compared to the cost of a separate insurance policy bought specifically for long-term care, the cost of this rider isn’t as expensive.

The American Association of Long-Term Care Insurance (AALTCI) says:

The average 55-year-old male in 2019 paid $2,050 in annual premiums for a policy with $164,000 in annual benefits.
The average 55-year-old female paid even more — $2,700 for the same coverage.

Real Costs of an LTC Rider

But you have to also think about the less obvious costs of a long-term care rider on your policy.

Each time you drew money from the death benefit, there’d be another cost: the depletion of your death benefit itself.

If you have a $500,000 death benefit and you use $200,000 of it for long-term care, you’d have only $300,000 left for your beneficiary to claim after your death.

This could undermine the entire purpose of your life insurance policy.

Some insurers take money from the death benefit disproportionately.

Each $50,000 you withdraw could reduce the death benefit by $75,000.

If possible, look for a dollar-for-dollar benefit to avoid this accelerated loss of coverage.

Permanent life insurance such as whole life, which builds cash value, could let you borrow against your policy’s cash value for long-term care.

This wouldn’t directly erode your life insurance coverage, but it would deplete your policy’s cash value.

Keep these costs — along with the sticker price for the rider itself — in mind as you consider options.

What Kind of Policies Have Long-Term Care Riders?

Some insurers may let you add an LTC rider to a term life insurance policy, but I seldom recommend it.

By the time you needed long-term care services, your term life insurance policy may have expired. This would mean that all the extra money you spent on the rider gained you no benefits.

That’s why most life insurance companies limit these riders to permanent life insurance policies such as whole or universal life coverage.

LTC riders work best with whole life policies since they have a guaranteed level death benefit.

Universal life has more flexibility, allowing the policyholder to use the cash value to lower premiums or reduce the death benefit later in life.

As such, an LTC rider could put too much strain on a universal policy during an economic downturn when the policy’s cash value hasn’t grown as anticipated.

What are the Limits of a Long-term Care Rider?

Insurance agents have a way of making riders seem simple.

To hear them sell it, an LTC rider is an elegant solution to out-of-control healthcare costs in the future.

You have all that money tied up in a life insurance policy, so why not use it when you need it?

In reality, repurposing your death benefit isn’t always so simple.

Along with proving your need through the activities of daily living as we discussed earlier, keep these limitations in mind as you shop:

Elimination period: In most cases, you’d face an elimination period of 90 days. This means you’d need another way to pay for care for three months before your insurance policy’s death benefit could help. The elimination period begins after you’ve proven you need to use the rider.
Tax implications: Normally, life insurance payouts are tax-free, but in some cases, they could be taxed as income — if the payout exceeds the standard cost of care as defined by the IRS and the payout isn’t a reimbursement. It’s possible this additional income could put your eligibility for Medicaid at risk.
Percentage of the policy: Most insurers let you take out only a portion of your policy’s face amount through an LTC rider. If you have a $500,000 policy that limits you to 60% access, you’d be able to spend only $300,000 on long-term care expenses.

Alternatives to a Long-term Care Rider

Since claiming long-term care benefits through a rider can compromise a life insurance policy’s face amount and/or cash value, many life insurance shoppers prefer other ways to address these needs, including:

Medicaid: This government health insurance program will pay for some long-term care costs, but states have income requirements that limit eligibility. Keep in mind some states may consider you ineligible for Medicaid because you have other long-term care coverage through life insurance.
Annuities: Since an annuity doesn’t have a death benefit to erode, some of our clients prefer adding LTC benefits to an annuity instead of a life insurance policy. Or, they may buy an annuity with plans to use its monthly benefits on medical care.
Surrendering the policy: Surrendering a whole life insurance policy could generate enough cash to pay some health care expenses, especially if you’ve been a policy owner for several decades and have built a lot of value.
Long-term care insurance policies: If you’re buying life insurance to protect family members in case you die and you’d rather not compromise the policy by adding LTC benefits, you may want to consider a separate long-term care insurance policy.
Savings or investments: Some people have enough money in savings or in other assets to pay for their own home care or for their time in an assisted living facility.

Remember, you can often combine two or more of these alternatives — including LTC benefits on a life insurance policy — to create a more thorough plan for long-term care coverage.

Is an LTC Rider Different from a Chronic Illness Rider?

A chronic illness rider is another form of an accelerated death benefit rider. But it is distinct from the long-term care rider.

Qualifying for a chronic illness rider’s benefits would mean you’re permanently and chronically ill. You aren’t receiving health care, so you can later return to your normal life.

Instead, you’d need the benefits for the rest of your life.

Chronic illness benefit amounts also tend to be paid out as a lump sum or an annual payment instead of a monthly benefit for reimbursement.

It’s easy to confuse these two riders when you’re shopping for insurance products.

Should I Buy Life Insurance With a Long Term Care Rider?

It’s admirable that you’re exploring long-term care insurance options.  And considering building this functionality into your life insurance policy through an LTC rider.

An LTC rider could help pay for a nursing home or an in-home licensed healthcare provider while you recover from an accident or illness.

This could keep your family from having to find other ways to pay for this kind of care.

But before adding any rider, I always advise clients to consider the reason they’re buying life insurance.

If you’re buying life insurance to protect your income or to make a donation to a foundation, using an LTC rider could compromise your primary goal for buying a policy by eroding the death benefit.

If you’re buying a policy to grow as an asset as you age, the long-term care rider could be a useful addition.

The rider could give your policy yet another layer of financial protection for your family members in the future.