Posted on Jun 11, 2018 in Financial Planning
According to the Genworth 2017 Cost of Care Survey, for the average American, the average cost for long-term care is about $49,000 for home assistance, $45,000 for an assisted living community, and roughly $97,000 for having a private nursing room. Because prices can be so high, it’s important to find a long-term care insurance provider that will be able to help cover your expenses. If you don’t have a provider however, there are still financial planning options available to help pay for long-term care for yourself or a loved one.
Life Insurance For Long-Term Care
Before you begin to look, it’s important that you already understand what your current life insurance policy is. For a quick breakdown of the types of policies that can help you pay for long-term care, see below:
Contains a death benefit along with a savings component. A portion of the premiums you pay here go towards savings that allow you to build up cash value.
A flexible way to accumulate savings, universal life insurance has premiums that fluctuate depending on your needs, but more importantly, allows you to build cash value.
You can accumulate no cash value with this type of life insurance, and only offers a death benefit, so there’s nothing you can use here to help pay for long-term care.
Hybrid has long-term care benefits built into it already. In addition to the death payout, you can also get long-term care insurance coverage, living benefits for cancer, strokes, or other illnesses.
Depending on your type of insurance policy, there are different ways that you can withdraw some cash value and put it towards a long-term care plan.
A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. People often do this with traditional term insurance as a way to put money towards a long-term benefit plan. One of the major caveats is that third-party buyers will typically not buy these off of you unless you have a minimum of $50,000 death benefit.
This type of method is generally recommended for those with a shorter life expectancy, and who find themselves in need of care. After you sell your policy, the money gets deposited in an FDIC insured bank account that can be professionally managed by a licensed benefit management company. Payments can be made directly from the account to the account holders selected home care agency, assisted living facility, or caregiver.
However, if you use this method, there will little to no death benefit left to your heirs when you do pass, plus you will be taxed on the money you receive because you have sold a piece of property according to the Supreme Court.
By surrendering a life insurance policy, you officially give up ownership of the policy along with the death benefit to the insurance company. You can surrender your policy at any time and get the “surrender cash value,” which is just the accumulated cash value of the policy. The company will write you a check for the full amount of cash value, in which you must now pay taxes.
Unfortunately, some insurance companies will penalize holders who surrender their policy early on. One important thing to note is that if you plan on using Medicaid to cover long-term care, the cash portion of your life insurance policy (or the amount you receive when you surrender the policy) will become an asset and count against you for further Medicaid eligibility.
To surrender a policy is a fairly easy process. First, you contact your provider and inform them that you intend to surrender your policy. They will give you a form to fill out, which you must mail to the company and confirm over the phone. From there, you will be taken off the policy and mailed a check for your accumulated cash value.
Not many people are aware of this, but you can take a loan from your life insurance accumulated cash value. This is a better option than surrendering because you can still retain ownership of your policy, including the death benefit. If you don’t desperately need every dollar from your policy, taking a loan might be the best option for funding your long-term care. You’ll have to pay interest, so be careful when taking out a loan on your life insurance.
An important thing to note is that you can only borrow against permanent or whole life insurance. Term life insurance does not have an accumulated cash value. Unlike other loans, policy loans do not affect your credit and do not require you to undergo a screening process. It is also kept from IRS scrutiny, so you don’t have to pay taxes on it or report what it is used for.
If you have time and wish to escape paying taxes on your withdrawn cash value, you may want to consider a 1035 exchange. A 1035 exchange allows you to exchange one insurance policy’s cash value into a new policy without having to pay any taxes on the money that is transferred. The 1035 is a good option if you want to move money from a whole policy to a hybrid policy that lets you put money towards long-term care and other health benefits.
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