More on Life Insurance
More on Life Insurance
Hybrid long term care policies cover the exorbitant cost of assisted living care and having one can even help you meet the qualifications for Medicaid.
Updated September 1, 2020
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A traditional life insurance policy pays out the death benefit to your beneficiaries if you die unexpectedly. But some policies offer riders that use the death benefit to offer financial support while you’re still alive. Hybrid long term care policies combine the long-term care rider with a traditional life insurance policy to pay for your care if you are unable to live independently. The payout covers in-home care, such as nurses or aides, or a stay at a living facility.
While a hybrid long term care policy is costlier than your average term or whole life insurance coverage, for some people, it can be a fundamental part of estate planning. Not everyone needs it, but if you want to pass on your estate to your heirs and can afford the policy, getting a hybrid life insurance policy can mitigate the risk of depleting your assets to pay for care.
A hybrid long term care policy covers the costs of assisted living care if you cannot continue to live independently
The cost of assisted living care is high — a private room in a nursing home costs as much as $102,200 a year
Because of the high costs of assisted living care or at-home nursing, it is important to have a financial strategy in place far before you incur a disability
A hybrid long term care policy is a form of asset preservation. It’s meant to ensure that your estate isn’t depleted by the costs of your care and that your heirs can still receive their inheritance when you die.
Hybrid policies combine traditional life insurance with a long term care rider, which pays out while you’re still alive if you can no longer take care of yourself and need professional care. If you use a long-term care rider, the funds need are withdrawn from the death benefit and paid out to your service providers — like a nursing home or at-home care provider — instead.
To qualify for the long-term care rider, you must fall into your insurer’s definition of disability, which usually means you can’t independently perform two of the six activities of daily living (or ADL).
The six activities of daily living are:
While the long-term care rider withdraws from the death benefit to cover your assisted living costs, it won’t cover costs that would normally be covered by your health insurance, such as doctors’ visits, prescriptions, or surgeries.
If you’re no longer able to care for yourself and perform the six daily activities of living, assisted care can cost well into the thousands every year — and it’s often not covered by health insurance. According to a study by Genworth, a long-term care insurance provider, here’s how much various services cost on average annually:
With inflation, these costs are expected to rise. In just nine years, Genworth expects these same services to cost thousands more than they do now.
There’s one caveat of using a long-term care rider to cover the costs of assisted care: it only covers the first five years of assisted living care. After which your assets, a standalone long term care insurance policy, or Medicaid would cover care expenses.
But standalone long-term care insurance policies can be cost-prohibitive, and depleting your assets for care could mean you won’t be able to leave anything behind for your heirs. And to qualify for Medicaid, you’d need to meet certain requirements that cap how much income you earn or can own in assets.
Why not just utilize Medicaid for long-term care from the get-go? The short answer: you might not be able to.
To qualify for Medicaid, you need to be below a certain income level and cannot exceed the maximum limit in owned assets. When applying for Medicaid, you’ll need to release any documentation pertaining to your finances for the past five years to the Department of Social Services to evaluate if you meet their requirements. This is referred to as the look-back period and affects whether or not you receive Medicaid benefits. They won’t just look at the assets you currently own – they’ll evaluate any assets you transferred out of your name within that five-year time frame.
But if you plan ahead, you still have the option to use Medicaid for care — thanks to something called the look-back period and Medicaid asset spend down. Long-term care riders only pay out for the first five years of disability but allow you to create a robust plan in advance to ensure that your long term care expenses are covered indefinitely.
A disability, much like death, can happen unexpectedly. Planning ahead for financial protection, far before you need, is the best way to pay for care without depleting your savings. Planning is essential — you should decrease your assets almost immediately if you incur a disability so that you can rely on the long-term care rider for five years and then qualify for Medicaid once the rider expires. To qualify for Medicaid, you’ll need to prepare for the Medicaid spend-down:
If your assets exceed Medicaid’s eligibility maximum, you can “spend them down”, or essentially, decrease how much you own to meet Medicaid’s eligibility criteria. If you would rather sell off your assets, your earnings will still count as a part of your worth.
To spend down your assets to qualify for Medicaid, you’ll want to keep in mind what is considered a countable asset and what won’t be considered an asset by Medicaid.
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Countable assets are capped for Medicaid eligibility and may need to be a part of your Medicaid asset spend-down plan in order for the cost of care to be covered. These include:
Your non-countable assets do not need to be considered in your Medicaid asset spend-down plan in order to meet Medicaid eligibility requirements. These include:
The cost for a long-term care rider varies depending on your insurer, age and other factors. While many riders can be added on to your life insurance policy for a flat additional fee, long-term care riders are considered a separate insurance product and can be an additional $600-$800 annually if you purchase the rider early enough. As you age and your health worsens, the rider gets even costlier.
Most whole life and guaranteed life insurance policies offer the option to add on a long-term care rider when you’re initially getting coverage. Occasionally there will be restrictions on how much coverage you need to have to qualify for the rider — there is a minimum face amount of $100,000 in life insurance coverage.
If you don’t opt-in for a hybrid long term care policy, you can still ensure coverage for assisted living or other care expenses, though they come at an additional cost. Standalone long-term care insurance policies can be a better alternative to a hybrid policy with a long-term care rider because using one won’t deplete the life insurance death benefit you’re leaving behind for your beneficiaries — but standalone policies are a lot costlier.
If your income and assets are low enough that you qualify for Medicaid from the get-go, that will pay for your long-term care. Though the caveat with government-sponsored care is that the program will also choose the care provider for you.
For example, if you need nursing home care and currently reside in New York, you may be required to stay at a nursing home in a nearby state that is less expensive. On the other hand, if you utilize Medicaid for care after relying on the long-term care rider for five years, Medicaid cannot relocate you or switch your care — it will cover costs for the care you already have in place.
The final — and riskiest — option is dipping into your savings or estate to cover the high costs of your care. Even if you have enough in assets, you’re still draining your estate. A private room in a nursing home for ten years could cost as much as $1,022,000 — or more if costs continue to rise in the coming years.
Planning ahead is pivotal for long-term care, and even more so if you plan to use Medicaid to pay for assisted living and care expenses. You’ll need to spend your assets down five years before you apply for Medicaid. Any later, and your application will be rejected if the value of your estate is too high. Additionally, if you gift your assets within the five-year look-back period, you may have to pay penalties.
Whether you opt for a long-term care rider or a standalone long-term care policy, make sure to talk to a financial adviser well in advance about a financial strategy that covers your care while protecting your heirs.
After age 65, one in two Americans requires some type of assisted care. And though the need for a hybrid long term care policy usually occurs in older age, there are circumstances when someone young and in good health can suddenly sustain a disability that requires long term medical assistance.
If you’re retired, a long-term care rider can be an important part of setting up your heirs for financial success while ensuring you’re able to pay for it. When you’re still in the workforce, a disability insurance plan to replace potentially lost income if you become disabled may be more important than a long-term care rider — but even if you’re still earning an income, adding the rider onto your life insurance policy while still having a standalone disability insurance plan is the best way to prepare for the future.
It’s better to get it while you’re younger because similarly to standard life insurance, the cost of adding a long-term care rider onto your policy increases with age — and may even become cost-prohibitive as you entire retirement.
Even though you may need it 30 or 40 years down the line, getting a policy early on can ensure you get a cost-effective rate and don’t risk you or your family’s financial health.
The costs of assisted living or nursing care are strikingly high, making it of the utmost importance that you have a financial plan in place far before you need to pay for care. If you don’t qualify for Medicaid, a hybrid long term care policy can provide that protection — and at a lower cost than a standalone long term care policy — but it also depletes the death benefit your beneficiaries will receive when you die.
To make sure you’re fully prepared for the unexpected, evaluate your options with a certified financial adviser as far in advance as possible. Getting coverage early on makes it more affordable and having a plan in place mitigates the risk of not being able to get essential care should you need it.
Nupur Gambhir is a life insurance editor at Policygenius in New York City. She has researched and written extensively about life insurance since 2019, with specialties in life insurance companies, policy types, and end-of-life planning. Her writing on insurance and finance has appeared on MSN, The Financial Gym, and end-of-life planning service Cake. Previously, she worked in marketing and business development for travel and tech.
Nupur has a B.A. in Economics from Ohio State University.