07 Oct Creative ways to pay for long-term care

Q. I’m wondering if life insurance could be an option if you can’t afford long-term care insurance. If you can afford a non-term life insurance policy, the life insurance policy has value immediately if there’s a death. And if you have long-term care needs in the future, could cashing in the policy or taking cash value be an approach? If the cost is $200 per day or $75,000 per year, and the typically person needs long-term care for two or three years, we’d be talking about a $150,000 to $225,000 life policy. Or, what do you think about using the value of your home by selling as you go into a facility or doing a reverse mortgage?

A. Your ideas could work, but there are several caveats.

In the case of using a whole life insurance policy, let’s make sure you fully understand the product.

Whole life insurance has many advantages and provides a lot of flexibility for cash value use, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

“If the cash accumulation is significant enough, it can be used as collateral to borrow from the insurance company to pay for any level of long-term care,” he said. “In essence you wouldn’t be taking money from the policy, only borrowing against it.”

Should an insured die, the amount of any outstanding loan would reduce the death benefit, he said.

The policy can also be surrendered and the full cash value can be distributed to use to pay for care.

“This may create a taxable event if the cash distribution is greater than the ‘cost basis’ — in the simplest terms, the amount of cumulative premiums paid into the policy — and you’d lose the death benefit,” Gaelick said.

Or, there could be a cash value of “paid-up additions,” which can be surrendered without triggering any taxable event, Gaelick said. That would reduce the total cash value and death benefit but the policy would remain in force.

While using this kind of life insurance policy to access funds for long-term care works in theory, there are many variables that could stop the strategy from working.

The cash value is accumulated over an extended period of time and is a result of paying premiums substantially higher than the actual mortality costs, said Steven Gallo, a certified public accountant with U.S. Financial Services in Fairfield.

Gallo said if you’re not in the financial position to afford the premiums for long-term care insurance, you probably will not be able to afford the life insurance premiums required to build the amount of cash value you would potentially need.

“If you are thinking about starting this type of policy today you may also not have enough time to accumulate the cash value needed depending on your current age,” he said.

But there are permanent insurance policies available today that provide an optional long-term care rider, he said.

“These policies allow for the insured to access the death benefit prior to death to pay for long-term care costs,” Gallo said.

Unlike the policies referenced above, this money would be available shortly after the policy is put in force, he said.

“The premiums are also considerably lower since they are not designed to build cash value but rather to provide simply a death benefit,” he said. “Depending on the company you choose the actual cost of the rider is minimal.”

Keep in mind, however, that any money paid by the insurance company to pay long-term care costs will reduce the death benefit of the policy.

Gallo offered this example: If you purchase a $1 million policy with the long-term care rider, and during your lifetime the company advances you $250,000 for long-term care costs, upon your death, your heirs will receive $750,000.

Now, the option of using equity in your home.

Gallo said the use of the equity in your home is not only an option, but a requirement if you have not provided other means to pay long-term care costs.

“This presents other issues if you are married and only one of you needs long-term care since selling the home may leave one spouse or the other looking for a place to live,” Gallo said.

Reverse mortgages are also an option, Gallo said, but they can be expensive.

It sounds like you should consider meeting with a financial advisor to see which of your ideas are feasible in your specific situation. Make sure the person is highly knowledgeable about whole life policies and long-term care riders.

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This story was first posted in October 2015.