As the cost of traditional long-term care insurance (LTCI) has dramatically increased, linked benefit and life insurance policies with riders that allow access to the death benefit while alive have gained a lot of attention as alternative strategies.
Unlike traditional life insurance, which just provides a death benefit, or long-term care insurance that only pays for qualifying expenses, a linked benefit policy has a death benefit, maintains a cash value and can provide income tax-free payments for qualified long-term care related expenses. Depending on the insurer, the underlying life insurance policy can be universal or whole life. However, unlike traditional life insurance where premiums may be paid over a lifetime, linked benefit policies require either a single lump sum premium payment or a series of up to 10 annual payments. (See also: How Long Term Care Riders on Life Insurance Policies Work.)
How it Works
A linked benefit policy has three components:
- An income tax free benefit that pays for long-term care expenses that could include home care, adult day care, assisted living and/or skilled nursing care. The policy is issued with a monthly benefit that is paid for a specific number of years, based on the policy design and riders purchased. Some policies offer benefits that can last for up to seven years.
- An income tax free death benefit from the life insurance. The death benefit is reduced by any loans, withdrawals and/or benefits the insurer has already paid. Many policies also offer a residual death benefit, usually 10% or 20% of the initial amount of insurance, if the entire benefit had been consumed by long term care expenses. (For more, see: Intro to Insurance: Long-Term Care Insurance.)
- A cash value that earns a set rate of return. Once all the planned premiums have been paid the policy can be surrendered for the actual cash value, which is often 80%-100% of the premium paid. Policy surrenders are subject to any vesting schedule and adjusted for any claims that have already been paid, loans or cash withdrawals.
The maximum amount of each policy benefit is stated in the contract when issued. Benefits amounts do change over time and depend on the premium and how it is paid as well as the age, sex and health rating of the insured. During their lifetime, the insured can use any one or a portion of all three policy benefits. For example, the insured could receive long-term care services for one year, then withdraw a portion of the cash value and have the remaining death benefit paid to the policy beneficiary.
Underwriting requirements for linked benefit products differ from traditional life or LTCI and tend to be more liberal, since the insurer has received the premium payment upfront and has less at risk. Many policies offer discounts for couples, whether one or both apply. Insurers vary and some issue policies up to age 80.
Depending on the insurer:
- Policies either provide reimbursement for actual qualifying long-term care expenses or offer an indemnity benefit. In either case the benefit amount is subject to IRS annual and monthly maximums. With reimbursement the insured sends expenses to the insurance company which then reimburses the provider. Under an indemnity plan a check is mailed directly to the policy owner each month for the full amount of the benefit. The money can be used for care or expenses that might otherwise not be covered. (For more, see: LTC Coverage Not a No-Brainer.)
- Benefits for home care and personal may have an elimination period that ranges from 0 to 90 days, while benefits for other services usually have a 90-day elimination period. Some companies offer a one time elimination period.
- Benefits for long-term care expenses can increase to keep pace with inflation. For an additional cost, policies offer both simple and compound inflation adjustments that range from 2-5%.
- A waiver of policy fees while on claim for long-term care services may be available.
To be eligible for benefits:
- A licensed health care practitioner must certify the insured either has a severe cognitive impairment or is unable to perform two or more activities of daily living.(For more, see: What are Activities of Daily Living?)
- The insured must meet any elimination period, which begins once they are certified as eligible and start receiving qualified LTC services. The days of care or services don’t need to be consecutive.
- The insured must receive services from an approved provider according to a prescribed plan of care setup with the insurer. While receiving benefits your licensed health care practitioner must recertify your care needs at least once a year.
Pros and Cons
Unlike LTCI the premium for a linked benefit plan is set at issue and will never increase. Also, linked benefits plans offer a death benefit as well as cash value so the coverage is not use or lose like LTCI. However, linked benefit policies do not offer a shared benefit pool and tend to provide a lower amount of benefit (and less leverage), since the premium is paid up front. One could potentially purchase a greater amount of coverage if life insurance and/or LTCI were purchased.
The Bottom Line
Depending on your goal, linked benefit policies can be a viable alternative to LTCI. However, the need to make a large premium payment to purchase an adequate benefit may make the coverage unaffordable for many people. (For more, see: Long-Term Care Insurance: Who Needs It?)