The life insurance industry was once known as being stodgy, but since they got their clocks cleaned via the disintermediation of the late ‘70s early ‘80s, they have actually become quite innovative. A recent innovation is a rider that can be attached to a life insurance policy that will pay for long term care expenses.
Traditionally, a life insurance policy paid proceeds only upon death. For the past several decades, many insurance companies have allowed for a portion of the death benefit to be accelerated for a terminal illness. Long term care insurance (LTCI) riders will advance a portion of the death benefit to pay for long term care expenses.
Although the riders’ specifics vary from company to company, they all function in the same manner; that is, they will accelerate the death benefit when triggered. That is vitally important to understand. It is not a benefit in addition to the death benefit, but rather the acceleration of the death benefit to pay LTC expenses.
Generally, a policy will not pay more than the death benefit.* Proceeds may be paid upon death or while living (or some combination thereof), but the total amount paid won’t exceed the death benefit.
A problem that I see with the rider is its potential to compromise the death benefit. If there is a need for life insurance, but there is none at death because it was all used for LTC expenses, that could present problems. The riders don’t provide an additional benefit, but rather an alternative benefit. So if you’re buying it in lieu of an LTCI policy (with a death benefit if the LTC benefits are not needed), that’s fine. But if you have a permanent need for a death benefit, then I don’t believe the rider is appropriate.
The riders that I’ve researched are actually quite good. They can create a pool of money, ranging from 10% to 100% of the policy’s face amount, which could be available for LTC expenses. How that pool of money is paid out varies among the policies, as does the elimination period (from zero to 100 days). Some are paid via the indemnity method, while others use the reimbursement method. All of them generate benefits that are generally income tax free, but not all of them are deductible.
They do not provide as much flexibility as an individual LTCI contract does, and there could be some tax issues with third party ownership, but the riders I reviewed (Guardian, Mass Mutual, AXA, John Hancock, Nationwide and Pacific Life) I found to be sound.
So if giving up a little flexibility in exchange for a death benefit should the LTCI not be needed appeals to you, an LTC rider might be appropriate. However, I urge caution in attaching the rider to a policy where a permanent life insurance need has been identified, because these riders have the potential of using the entire policy for LTC expenses, leaving no (or at best, a very small) death benefit.
*There are two companies that I am aware of that will issue a universal life policy that has the potential to pay more in LTC benefits than the death benefit. Those two companies, Lincoln and Genworth, issue universal life policies that are structured as LTCI contracts that pay a death claim if the LTCI goes unused. In other words, the riders are part and parcel of the contract itself; people don’t buy the base universal life plan without the riders.