Life Insurance with Long-Term Care Access: Covering all the Bases

Most people begin thinking about long-term care insurance – if they think about it at all – once they reach their 60’s or beyond.  Unfortunately by that age the cost may seem to be prohibitive to many of those interested in purchasing the product, or health conditions may render an applicant uninsurable.  And frankly, most people believe the need for long-term care will only apply “to the other guy.”  So, the reasoning goes, “if I don’t use the insurance, then all of my premium payments will be ‘wasted.’”

But the fact is that approximately 50% of all seniors will need at least some form of long-term care.  With the costs for care increasing by leaps and bounds – in the Hudson Valley, the cost for in-home care will run approximately $250 per day, and nursing home care is at least $350 per day -- very few people have sufficient resources to cover the costs for any extended period.  And, with governmental budgets shrinking, it is unlikely that Medicaid will continue to be available to cover a large chunk of long-term care costs for the ever-growing baby boomer population.

A possible solution for those reluctant to buy long-term care insurance is the availability of a growing number of “hybrid” life insurance policies that provides lifetime access to the death benefit to cover long-term health care costs.  These hybrid policies have been gaining in popularity, with sales increasing by 19% in 2012 over the previous year.

The hybrid policy generally works as follows: the policy provides a fixed death benefit and includes a chronic illness rider. Should the insured become disabled – typically defined as suffering from cognitive impairment or needing assistance with two or more “activities of daily living” such as dressing, bathing, toileting, transferring or eating -- then the death benefit can be “accelerated” with payments typically of 2% of the death benefit per month to cover long-term care costs. A hybrid policy with a $500,000 death benefit, for example, would provide up to $10,000 per month for 50 months for long-term care needs.  To the extent that long-term care is not needed, the remaining death benefit would be paid to the surviving spouse or other heirs. 

A potential downside is that ownership of a life insurance policy in your individual name would cause the death benefit to be includable in your taxable estate, which could result in estate taxes being owed on the death benefit.  For example, if an unmarried person added a $500,000 hybrid life insurance policy to an existing $1 million estate, the resulting $1.5 million taxable estate would require payment of a New York estate tax of approximately $65,000.

One strategy to minimize the likelihood that the life insurance will result in an increase in estate tax liability is to utilize a "Special Needs Irrevocable Life Insurance Trust" established by the insured's children to own the policy.  The parent would make cash gifts to the children, who would use the cash to pay the premiums for the life insurance policy owned by the trust.  Should the insured require financial assistance to pay for long-term care, the accelerated death benefit can be triggered, with the trustee (usually the children) having discretion to use the benefits to contribute towards the parent's long-term care needs.  If the parent is Medicaid-eligible, the children would not be forced to distribute money from the insurance policy to cover the parent's long-term care costs, and the death benefit can remain intact.  Adding icing to the cake, since the parent has no retained ownership interest in the policy, the death benefit would not be included as part of the parent's taxable estate.