Types of Long Term Care Insurance Policies

Unlike 10-15 years ago, today many types of long term care insurance coverage are available to the consumer. The following provides a brief summary of some of the different insurance vehicles that offer long term care insurance coverage.

Individual (Or Group) Comprehensive Long Term Care Policies

These represent the majority of the long term care policies sold today. These policies are designed to cover virtually all long term care services and are usually purchased with monthly, quarterly, semiannual or annual premiums paid for the life of the insured. With some insurance companies abbreviated payment schedules are available with policies fully paid up after 20 years, 10 years or one year, depending on the terms of the policy. This type of long term care insurance policy is similar to the typical individual or group health insurance policy and tries to cover as many care alternatives as possible.

Rider to A Cash Value Life Insurance Policy

This type of policy actually includes two separate coverages in one policy, with the premium split to pay for both life and long term care insurance coverage. The long term care rider differs from the "accelerated death benefit," a popular feature of many life insurance policies. An accelerated death benefit pays part of the life insurance death benefit for terminal illness or for doctor-certified terminal long term care while the insured is living. Since long term care typically cannot be certified as care for a terminal patient, the accelerated death benefit does not apply to most long term care situations.

Either/Or Feature In A Life Insurance Policy

If you purchase a life insurance policy with an either/or feature, it works like this: If the insured dies, a death benefit is paid, just like a regular life insurance policy, but if the insured needs long term care before death, specified benefits are paid instead of life insurance. If all benefits are paid before death, the policy expires. Any benefits specified for long term care that are not used prior to death are provided as a reduced death benefit. What you are buying is a policy with the potential to cover both contingencies – long term care and death -- although the amount of the death benefit will be determined by the amount of any long term care benefit used. This type of policy can be purchased with periodic premiums over the life of the insured or with a single premium of $50,000 or more.

An advantage of this type of policy is that the insured is guaranteed a benefit. A disadvantage is that many people who purchase long term care insurance don't need life insurance. Because the policy covers both the mortality risk of death and the morbidity risk of long term care, premiums are much higher than an equivalent stand-alone long term care policy. Another disadvantage is that the underwriting standards for life insurance are stricter than standards for long term care insurance. Many who qualify for long term care insurance would be denied for life insurance.

Integrated Into A Single Premium Deferred Annuity

This usually requires a single, lump sum payment of $50,000 or more. Part of the earnings on the annuity is used to fund the long term care morbidity risk, which reduces the actual earnings credited to the annuity. Thus an annuity that would normally earn 6% might only yield 4% when combined with long term care insurance. One advantage of this approach, though, is that long term care premiums are paid with tax deferred earnings and since they are expensed inside the annuity premiums, the premiums become tax free. A second apparent advantage is the perception that no money is spent on a long term care policy if the long term care benefit is never used. In fact the annuity lump sum even grows larger. Of course, money is actually spent because part of the annuity earnings is used to cover the long term care premium. Therefore, the lump sum grows larger but not as fast as it would if some of its earnings were not being used to pay the long term care premium. A significant disadvantage is that the money is tied up in the annuity. Removing money will kill the long term care coverage, perhaps just before you need it. At death, proceeds would go to a named beneficiary. Few people have $50,000 that they are willing to tie up for an extended period of time. In most cases, it is better to fund a stand- alone long term care policy with the earnings from a separate investment account.

Combined With A Disability Income Policy

Prior to age 65, this kind of policy can only be used for disability income benefits but premiums paid after age 65 provide long term care coverage. Premiums for this type of policy will be higher than a stand-alone disability income policy since a portion of every premium must be set aside in reserve for future long term care claims.