As the cost of traditional long-term care insurance (LTCI) has dramatically increased, linked benefit and life
insurance policies with riders that allow access to the death benefit while alive have gained a lot of attention as alternative
strategies.
Unlike traditional life insurance,
which just provides a death benefit, or long-term care insurance that only pays
for qualifying expenses, a linked benefit policy has a death benefit, maintains
a cash value and can provide income tax-free payments for qualified long-term
care related expenses. Depending on the insurer, the underlying life insurance
policy can be universal or whole
life. However, unlike traditional life
insurance where premiums may be paid over a lifetime, linked benefit policies
require either a single lump sum premium payment or a series of up to 10 annual
payments.
How
it Works
A linked benefit policy has
three components:
- An income tax free benefit that pays for long-term care
expenses that could include home care, adult day care, assisted living
and/or skilled nursing care. The policy is issued with a monthly benefit
that is paid for a specific number of years, based on the policy design
and riders purchased. Some policies offer benefits that can last for up to
seven years.
- An income tax free death benefit from the life
insurance. The death benefit is reduced by any loans, withdrawals and/or
benefits the insurer has already paid. Many policies also offer a residual death benefit, usually 10% or 20% of the initial amount
of insurance, if the entire benefit had been consumed by long term care
expenses.
- A cash value that earns a set rate of return. Once all the planned premiums have been paid the policy can be surrendered for the actual cash value, which is often 80%-100% of the premium paid. Policy surrenders are subject to any vesting schedule and adjusted for any claims that have already been paid, loans or cash withdrawals.
Underwriting requirements for linked
benefit products differ from traditional life or LTCI and tend to be more
liberal, since the insurer has received the premium payment upfront and has
less at risk. Many policies offer discounts for couples, whether one or both
apply. Insurers vary and some issue policies up to age 80.
Benefits
Depending on the insurer:
- Policies either provide reimbursement for actual
qualifying long-term care expenses or offer an indemnity benefit. In either case the benefit amount is subject
to IRS annual and monthly maximums. With reimbursement the
insured sends expenses to the insurance company which then reimburses the
provider. Under an indemnity plan a check is mailed directly to the policy
owner each month for the full amount of the benefit. The money can be used
for care or expenses that might otherwise not be covered.
- Benefits for home care and personal may have an elimination period that ranges from 0 to 90 days, while benefits for other
services usually have a 90-day elimination period. Some companies offer a
one time elimination period.
- Benefits for long-term care expenses can increase to
keep pace with inflation. For an additional cost, policies offer both
simple and compound inflation adjustments that range from 2-5%.
- A waiver of policy fees while on claim for long-term
care services may be available.
Eligibility
To be eligible for benefits:
- A licensed health care practitioner must certify the insured
either has a severe cognitive impairment or is unable to perform two or
more activities of daily living.
- The insured must meet any elimination period, which
begins once they are certified as eligible and start receiving qualified
LTC services. The days of care or services don’t need to be consecutive.
- The insured must receive services from an approved
provider according to a prescribed plan of care setup with the insurer.
While receiving benefits your licensed health care practitioner must
recertify your care needs at least once a year.
Pros
and Cons
Unlike LTCI the premium for a linked benefit
plan is set at issue and will never increase. Also, linked benefits plans offer
a death benefit as well as cash value so the coverage is not use or lose like LTCI.
However, linked benefit policies do not offer a shared benefit pool and tend to
provide a lower amount of benefit (and less leverage), since the premium is paid up front. One could
potentially purchase a greater amount of coverage if life insurance and/or LTCI
were purchased.