A long-term care rider on a permanent life insurance policy allows you to use some of the policy's death benefits to pay for your long-term care. But there's more to consider before deciding whether purchasing a policy with this type of added benefit makes sense for you.
Here are 6 things to know about long-term care riders.
1. There Are Two Types of Long-Term Care Riders
A long-term care rider — which is only available as a supplement to permanent life insurance policies (like whole life or universal life) or annuities — comes in two types: reimbursement plans and indemnity plans.
Reimbursement Long-Term Care Riders
With a reimbursement long-term care rider, you pay for the qualifying care upfront, and the insurance company repays you. The amount you can receive in reimbursements is limited to the daily, monthly and annual maximums the insurer sets. Reimbursement riders are the most popular of the two options because they usually cost less.
Indemnity Long-Term Care Riders
An indemnity long-term care rider pays out benefits in a lump sum or monthly installments. The insurance contract specifies an amount for each type of care and pays it automatically when you qualify, regardless of what your care actually costs. With this type of long-term care rider, it's possible to receive benefits that exceed your out-of-pocket costs. However, it's important to note that any benefits above the daily limits of the federal Health Insurance Portability and Accountability Act may be taxable. Because of its higher potential benefits, an indemnity rider costs more than a reimbursement rider.
2. How To Qualify for Long-Term Care Rider Benefits
To qualify for long-term care rider benefits, you must have a licensed medical professional, like your doctor, certify your eligibility. The requirement is that either you can't perform at least two activities of daily living or you need major supervision because of a cognitive impairment. The five activities of daily living are eating, bathing, dressing, moving from one place to another, using the toilet and maintaining continence. Your policy may impose a 90-day waiting period before it begins paying the benefits.
3. A Long-Term Care Rider Covers Long-Term Expenses
Long-term care riders cover nursing home and assisted living costs, home healthcare, private nursing fees and other long-term care expenses. Some policies will only pay for the care you receive from licensed providers, while others let you use the money to pay family members to provide care. Those that allow the family care option require you to submit a care plan from a licensed healthcare professional.
4. Benefits Are Capped at a Certain Point
The monthly dollar amount limits of your long-term care benefits, as well as the maximum lifetime benefit, are typically set as a percentage of your policy's death benefit. Most insurers cap the rider's lifetime benefit at between 70% and 80% of the death benefit, according to Policygenius.
5. Long-Term Care Riders Are Sold Separately
Long-term care riders are sold as separate products from your main life insurance policy, with their own monthly fees. The cost of a long-term care rider can add several hundred dollars a year to your original life insurance premiums.
6. Payments Are Subtracted From Your Death Benefit
The amount of each payment you receive from your rider to cover long-term care is subtracted from the death benefit of your life insurance policy. That means the payout your beneficiaries receive will be lower than the value of the policy when you bought it. However, some policies provide a guaranteed minimum death benefit even if you use up the maximum long-term care benefits of the rider.
A long-term care rider is one way to pay for care that Medicare doesn't cover, but it can be expensive. Talk to an insurance agent or financial planner about the pros and cons before deciding whether it's the right choice for you.