Standalone long-term care insurance policies can be prohibitively expensive. For that reason, the insurance industry has developed a long-term care rider that can be attached to an annuity. The rider enables the owner of the policy to benefit from both the income provided by the annuity, as well as the long-term care benefit, should that become necessary.
Long-term care riders have become important due to the fact that nearly 50% of everyone over the age of 65 is likely to find themselves needing long-term care at some point during their lives. In addition, long-term care is prohibitively expensive.
According to Genworth the average cost for an assisted living facility in 2016 was $3628 per month, or $43,536 per year, while the cost of a semiprivate room in a nursing facility was $6,844 per month, or $82,128 per year.
Geography also plays a major role in the actual cost of care. For example, in high-cost states, the cost of care can be significantly higher than the national average. By contrast, if you live in a lower-cost state you should fully expect the costs to be lower.
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It would be enough of a financial burden simply to cover one year in such a facility. But when you consider that many people live for several years in long-term care facilities, the cost can be overwhelming. This is the reason why the insurance industry has added long-term care riders to annuity plans.
How Does A Long-Term Care Annuity Work?
Just as is the case with all riders, a long-term care rider is a supplement to an annuity and not a standalone policy. However, your application for the rider does have to be medically underwritten, similar to what would happen if you were applying for a life insurance policy.
In order to properly price the long-term care rider, the insurance company will first have to determine the likelihood that it will pay a claim on the rider. That means that they will have to consider your current health condition, genetic factors, potential hazardous behaviors, and your age.
You can choose the monthly benefit that will be paid out from the long-term care rider. This typically ranges between 1% and 5% of the death benefit of the policy. Since the premiums that you will pay for the rider are not tax-deductible, the benefits that you will receive will be tax-free.
Unlike a standalone long-term care policy, you will not be able to deduct the premiums as an itemized medical deduction.
You can also choose the length of time that the benefits will be paid out. For example, you can choose a rider that will pay long-term care benefits for two years or five years. The lower the term of the benefit payout, the less expensive the premium payment will be. The most expensive would be a rider with a lifetime payout if such a time frame is even offered.
A long-term care rider can be set up either as an indemnity or as a reimbursement plan. If it is set up as an indemnity, you will be paid the maximum benefit allowed under the policy. This means that you will not be required to document the actual expenses incurred in your care. You will be paid the benefit amount, and you then be able to disburse the funds as needed.
By contrast, a reimbursement plan limits the benefit paid to the actual amount of expenses incurred. You’ll have to provide receipts for all expenses paid, and there is a possibility that certain of those expenses will be disallowed under the policy.
Determining When the Long-Term Care Benefit Will Be Paid
When you take a long-term care rider, it’s important to understand that you will not have the option of determining when you can begin receiving benefits under the plan.
That means, for example, that you won’t be able to simply decide that it’s time for you to go into assisted living, and then have the policy payout.
In order for the benefit to begin, a physician must certify that you are unable to perform at least two out of the following six activities of daily living.
These activities are actually prescribed under federal law.
The six activities include:
- Bathing independently
- Dressing independently
- Eating (feeding yourself)
- Transferring (being able to walk at least very short distances)
- Toileting independently
- Continence – the ability to control your bladder and bowel functions
You must be unable to perform at least two of these activities for at least 90 days or be shown to suffer from severe cognitive impairment. All such definitions will be included in the long-term care rider policy.
Long-Term Care Rider Costs
The cost of a long-term care rider varies widely from one person to another. Age and overall health, as well as genetic factors, are used by the insurance company to price the rider.
Just like with any insurance underwriting decision, the insurance company will be evaluating the risk that you will be filing a claim for long-term care.
Naturally, the insurance company will prefer customers who are less likely to ever need the benefit. And the less likely you are determined to be in need of the benefit, the lower the premium rate will be. Conversely, if your risk assessment holds that you are more likely to need the benefit, you will pay more.
As is the case with a standalone long-term care policy, the older you are at the time you take the rider, the higher the premium will be. This is because the older you are, the more likely it is that you will need the benefit. For this reason, it always makes sense to add this rider as early in your life as possible.
The actual amount of the benefit will also be a factor that affects the price. The higher the benefit that you select, the more expensive the premium will be. For this reason, you should balance out exactly how much of a benefit you think you will need.
For example, if you expect that it will cost you $8,000 per month to be in a nursing home, you should first evaluate what other resources you are likely to have available. If you expect to receive $2,000 per month in Social Security income, plus another $2,000 per month in distributions from retirement plans like IRAs and 401(k)s, then you will only need the benefit to cover $4,000 per month. This will save you a considerable amount of money on the premiums for the rider.
Why You Might Want to Add a Long-Term Care Rider to Your Annuity
If you have an annuity already or are planning to purchase one in the near future, adding a long-term care rider to the plan could be one of the smarter decisions you can make. Given that there is something approaching a 50% chance that you will need long-term care at some point in the future, the rider will be an excellent way to cover that contingency.
Never make the mistake of assuming that the cost of long-term care will be covered by government insurance programs, such as Medicare or Medicaid. Medicare will only cover short-term nursing care. Medicaid will pay for long-term care, but you will be limited in the number of facilities that you can use since not all facilities participate in the Medicaid program.
In addition, in order to qualify for Medicaid, you have to first draw down all of your assets. Only then will you be eligible for benefits under that program.
A long-term care rider will provide the widest number of options in the event that you do need long-term care. But the other advantage is that with the rider, you won’t have to wait until you are broke in order to get the benefit. The long-term care rider will enable you to preserve your assets, even if you are determined to be in need of long-term care.
That will enable you to both get the care that you need and pass on your assets to your loved ones.
