Can I Use My Life Insurance To Pay For Long-Term Care?
Life Insurance Policies with Long-Term Care Benefits
Sometimes long-term care benefits are included in a life insurance policy or are sold as a rider to a life insurance policy. With one version called "Accelerated Death Benefit", your insurance company pays you a reduced amount of your death benefit as a lump sum or in periodic payments before you die to help you pay for long-term care services. These benefits are usually only paid when certain conditions are met. For example, benefits might be paid if you are diagnosed with a terminal illness, have a major organ transplant, or have been in a nursing home for six months.
Another type includes coverage for long-term care as part of the life insurance benefit. These polices generally draw down the death benefit first and then a rider pays for any long-term care needed after the death benefit has been entirely used up. Polices that combine life insurance and long-term care benefits vary widely and the methods used to calculate these benefits can be very complex.
These polices can be purchased with one large premium payment or with premiums paid periodically over time. Monthly administrative fees and certain other insurance costs may be deducted from the cash value or from the interest earnings of these polices. The 1996 federal tax law, HIPPA, may allow a deduction on your federal tax return of the portion of the premium that pays for the long-term care, and the benefits you receive might not be taxed as income. You should consult a tax advisor before you purchase one of these polices to find out what you can deduct, what benefits are excluded from income, and what amounts could be taxable.
Can Annuities Be Used To Help Pay for Long-Term Care?
Annuities are insurance contracts that pay interest on the premium you pay the insurance company. Although these may resemble a Certificate of Deposit, they are not federally insured. annuities are offered by most life insurance companies under two types of contracts: immediate and deferred.
Immediate annuities make periodic payments for a certain number of years or until a specific event, such as your death, has occurred. If you purchase an immediate annuity you could receive periodic payments until you die or until the end of the contract period. With a deferred annuity, payments do not begin until a specific event occurs, such as retirement or you reach a certain age.
People who have a health condition and would not qualify for a long-term care policy sometimes purchase annuities to create an income stream to help pay for the cost of long-term care.
You generally pay one large premium up front, and the annuity begins paying right away (immediate), or later (deferred). Typically you will have to pay a penalty called a "surrender fee" if you decide later that you want to get your original premium back or you want payments to begin sooner than the terms of the contract. Annuity contracts have a schedule to show how much the surrender fee will be and for how many years it will apply. If you need long-term care before annuity payments begin, some companies may waive the surrender fee.
