Life Insurance Policy May Help Long-Term Care Needs

Older farmer walking with children through field

Written By: Leah Chester-Davis

Long-term care costs are often prohibitive and leave folks in a conundrum. Do you pay high premiums for years? Or is it better to sock away money in savings? Those are just two of the many questions commonly asked.

One approach is to look at the tools you currently have. Take, for instance, life insurance policies. There may be ways to get a greater benefit, namely cash, from such policies that can help with long-term care.

If you already have life insurance, it pays to take another look at the policy, advises Tom Haarmann, Money Concepts financial services manager with Carolina Farm Credit. If it’s some form of whole life policy that’s been accumulating cash value, that might be a way to leverage money for long-term care, particularly if the death benefits are no longer needed. For example, a life insurance policy may have been secured when children were young. When they are out of the house and on their own the cash that has accumulated might be better used for long-term care.

“Let’s say the policy has accumulated $30,000 or $50,000, for example; a person could take out the cash value and put it into a traditional long-term care policy, which is expensive. Or a wiser option might be to put it into a long-term care annuity.

“A lot of people have annuities but they aren’t really sure how they work,” says Haarmann. “Most annuities have a death benefit that gets paid to the beneficiary when the holder of the annuity dies, but it’s not a tax-free distribution like normal life insurance. So if someone had $100,000 that pays to a son or daughter, he or she will have to pay income tax on that distribution. On the other hand, if someone has a life insurance policy, it will go to the beneficiary without any income tax requirements.”

One way to avoid the taxes might be to take the cash inside the annuity and transfer it to a life insurance policy that has a long-term care rider on it. “Now the distribution that comes out of it will be completely tax-free. They’ve taken a taxable instrument and turned it into a tax-free instrument. And they solved the problem of how to fund long-term care.”

Another possibility would be to look at what’s called a combination policy that combines life insurance with riders for both chronic and critical illnesses. Chronic would be for a certain condition that one may have to deal with and need money for medical treatment. With this type of policy it would be possible to pull out money for care as needed. For critical illnesses, such as a terminal disease, it may be possible to pull the money out while you are still living instead of waiting for the death benefit to kick in. The money might be used for any reason, such as a worldwide vacation or other items on a bucket list.

In this 4-part series we explore considerations such as using life insurance policies for long-term care, the difference between term and whole life, and the importance of disability insurance.


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