The Takeaways
- Life Insurance is better called “death insurance” for most cases because it covers the death of a policyholder and pay the coverage to the beneficiaries.
- Life insurance is the most altruistic insurance of all — to the extent that insurers will pay the beneficiaries rather than policyholders.
- Not everyone is altruistic, which is why not everyone will buy life insurance, especially if they do not a close family relationships.
- The need for long term cares changes everything. Unlike other needs for life insurance, buying long term care insurance is entirely for the policyholders themselves. Given the prevalence of health care needs at senior ages, nobody is safe without the coverage. Another even bigger driver is the cost of long term cares.
- You can buy a standalone long term care insurance or add a long term care rider to a life insurance policy. For most people, the latter is a better choice because a standalone policy is “use it or lose it” without accumulated cash value, while a life policy with a LTC rider allows death benefits to beneficiaries even if it turns out that you have no need for long term care.
Why Do We Want to Buy Life Insurance?
Why would anyone buy a life insurance policy? This is the question I have asked myself lately.
Do not take the question for granted, nor think it’s a no-brainer. After all, life insurance is not what the name may sound like: to insure one’s life. Life is full of risks and nobody can guarantee your life for even a short period of time like one year, let alone your whole life.
This is why many celebrities insure their body parts like voice, legs, hands, or feet? Even for those parts insurers will not guarantee the integrity and functioning of the parts, only compensate their losses.
Sometimes I tell myself that “life insurance” is a misnomer, and for the majority of life insurance policies, a more accurate name should be “death insurance,” because they cover your death event more than anything else, and the main beneficiaries are not you but your loved ones. In that sense, life insurance is the most altruistic or benevolent policy of all types. You really need to have a big heart to buy it.
Life Insurance for Final Expenses
I used to be with a life insurance marketing company that sells nothing but final expenses, meaning the only reason someone buying the policy and pay premium for it is that at the end of their lives their “final expenses” in life, such as the funeral, the cemetery site, and the cost related to cremation, will all be taken care of by the insurance company.
The fact that a firm is selling nothing else but final expenses shows a solid market demand for this type of policy. Apparently for some people, that’s the only reason for them to buy life insurance.
But there are several things to be noticed on final expenses. First of all, strictly speaking, final expense is not exactly nor entirely altruistic because the policyholders are mainly concerned about their dead bodies more than others.
Secondly, not everyone is willing to pay money today for something remotely in the future. For one thing, this is not one of the “hard needs” or “must haves” to consider, unlike foods, water and air. For high net worth individuals, final expenses are too small a portion of the money they leave behind, and are automatically included in their estate. But for those “have nots” it is too little for the beneficiaries. For example, would anyone buy a final expense policy when they still have mortgage outstanding?
Finally, we often hear stories that parents or grandparents decided to leave properties to the youth but then quietly used some of the money that is supposed to be passed down in its entirety to next generation. The truth is that gifts and inheritances are promises but as humans we may or may not be good at keeping the promises.
How Long Term Care Changes Everything
Buying life insurance to cover the need for long term cares makes perfect sense for two reasons: the need for cares and the cost of cares.
Let’s look at the need first. According to the Centers for Disease Control and Prevention (CDC), 70% of people who turn 65 years old will need some form of long-term care services and supports in their remaining years. That is almost 3 out of every 4 seniors, although the length and level of long-term care vary from person to person and often change over time. For example, women tend to need care longer than men, with women staying in long-term care facilities for an average of 3.7 years and men for 2.2 years.
CDC also gives the following percentages for people aged 65 or above:
- Percent of adult day services center participants: 63.3% in 2020.
- Percent of hospice patients: 94.8% in 2017.
- Percent of nursing home residents: 83.1% in 2018.
- Percent of inpatient rehabilitation facility patients: 87.9% in 2017.
- Percent of long-term care hospital patients: 74.3% in 2017.
- Percent of residential care community residents: 94.2% in 2020.
Now consider the cost of long term cares. According to the Administration for Community Living, the average cost for long-term care in a nursing home is $225 a day, which amounts to $6,824 per month for a semi-private room and $7,698 per month for a private room.
Guess what, for an average American, she or he will spend more money during their final stage of lives than they made. According to the Bureau of Labor Statistics, the average salary across the entire country in the first quarter of 2020 was $49,764 per year, which breaks down to $957 per week and $191.4 per working day.
Savings and Retirement Money May Not Cut It
Relying on your savings and retirement money is not a smart idea because it may not cut it for long term care costs. Notice Medicaid, a government program for low income individuals and families, requires meeting a low income threshold. Another government program, Medicare that covers people who are 65 or older, as well as some people under 65 with certain disabilities or conditions, only cover short term, not long term care needs.
This leaves two viable options for most if not all Americans: Buying long term care related insurance and buying life insurance with a long term care (LTC) rider.
Standalone LTC Insurance
When we talk about long term care insurance, this is what they have in mind: A special type of insurance policy that is designed specifically for LTC.
Long-term care insurance is an optional (unlike auto) insurance product that reimburses the policy owner for costs associated with long-term care. It is purchased before it is needed, with the knowledge that many older adults eventually need long-term care. Long-term care is expensive and isn’t covered by traditional health insurance or Medicare.
Long-term care insurance typically has an elimination period lasting 30 to 90 days at the beginning of the care period. This means if you buy a policy today, you will have to wait for at least 30 days, maybe even 90 days, before the insurance begins to cover your need of LTC. The covered person pays for the care during this period, and the insurance company evaluates medical records to determine if the person qualifies for reimbursement for long-term care. If the person qualifies, they can file a claim with the insurance company.
There are two types of long-term care insurance policies: traditional long-term care insurance and hybrid long-term care insurance. Traditional long-term care insurance is becoming less common due to high costs. Hybrid long-term care insurance combines long-term care insurance with life insurance or an annuity. Hybrid policies are more expensive than traditional policies but offer more flexibility.
Long-term care insurance is not cheap, and not everyone can buy a policy. Long-term care insurance companies won’t sell coverage to people already in long-term care or having trouble with activities of daily living. Private savings, Medicaid, annuities, and other insurance can also help pay for long-term care.
One of the most important features of standalone LTC policy is that it accumulate no cash value, so you must use it or lose it.
Life Insurance with LTC Rider
This is the option I would personally recommend. A long-term care rider is just a normal life insurance policy. You will receive death benefit when you die, but before that, you can receive a portion of the death benefit while you’re still alive, if the policyholder is unable to perform at least two of the six Activities of Daily Living (ADLs), they can access the long-term care benefit via the LTC rider. The monthly allowed amounts vary but could range from 1% to 4% of the policy’s death benefit.
The LTC life insurance rider allows you to combine your life insurance benefit and long-term care needs.
It is important to note the followings. First of all, while standalone long-term care insurance policies were more prevalent in the market, they’re now rare and can be expensive. More people opt for the rider option.
Secondly, you want to buy a permanent life insurance, not term life policy. The latter does not have cash value accumulated over time, it works exactly like standalone LTC insurance in the sense that if you don’t use it, you lose it. For example, if you buy a 15 year term life at the age of 30, and by the end of the 15 years when you are 45, you are still healthy and alive, you get nothing back from the policy.
On the other hand, if you buy a permanent or whole life, you pay premium over time and the money will be divided into death benefit and cash value. A permanent life policy will not be “using it or losing it” because the death benefit and cash value are stored like in a bank’s checking /savings account. They stay under your name — unless you prematurely used them up.
Finally, when you buy a permanent life insurance policy with a long-term care rider. You pay a bit extra above and beyond the life insurance premium. Long-term care riders pay either by reimbursement or cash indemnity.
A reimbursement policy means you collect the receipts from everything you’ve spent on long-term care, home health aides, occupational therapists, nursing homes, etc. You submit them to the insurance company, and you get reimbursed.
A cash indemnity policy means you get a set amount of money each month, regardless of how much you spend on long-term care. Some insurers are better than others. For example, Equitable life insurance, which has a partnership with Farmers, allows the insured to hire anyone you like to take care of you, whether your family members, your neighbors, friends or colleagues.