Buying a Long Term Care Rider: What You Need to Know
The insurance industry has changed since I started my career. Long-term care insurance policies were the recommended option, and the company I started with even had its own standalone home health care policy.
A New York Times article “Aged, Frail, and Denied Care by Their Insurers” left me stunned at how insurance companies that sell traditional long-term care insurance policies deny claims in case of need and I have witnessed it several times. It was hard to endorse this product after all the backlash. According to AARP, 52% of people who turn 65 today will develop a severe disability that will require long-term care at some point in their retirement. The US Department of Health and Human Services reports that 70% of people over 65 will need long-term care at some point in their lives.
So how do you approach such a delicate subject? Of course, you can always pay yourself or apply for government benefits — such as Veterans Aid and Participation or Medicaid — but the rules for qualifying are strict and continually changing. For example, the Department of Veterans Affairs implemented new guidelines on net worth and asset transfers in September 2018.
Long-term care insurance is still an option, but even big companies, such as GE, intend to impose a $1.7 billion premium increase through 2029 on its roughly 274,000 policyholders. long-term care insurance policies. The average age of policyholders is 77 years old. Can you imagine being affected by a substantial increase in the premiums for your long term care insurance policy after paying for it for over 12 years? (Learn more by reading 6 options for financing long-term care in retirement.)
While there are other options to traditional long-term care insurance — including life insurance and annuity long-term care riders — not all are structured the same. In fact, there are two types of endorsements that are often confused: 1.) long term care endorsements; and 2.) chronic condition riders.
What is a Long Term Care Rider?
A long-term care rider is an add-on or feature of a life insurance policy or annuity under IRC §7702B (the Internal Revenue Code regarding the treatment of long-term care) designed to help with long-term care costs. care services. Claims paid on these can be temporary or permanent (as opposed to chronic condition endorsements, which are only for permanent conditions). To be eligible for services, they must be recommended by a licensed healthcare professional, such as your doctor.
Long-term care benefits from a life insurance or annuity rider are paid in two ways:
With an indemnity policy, once the insured is entitled to benefits, monthly payments are made according to the contract. The policy automatically pays the specified dollar amount directly to the policyholder each month, regardless of the actual cost of care.
Benefits paid in excess of the HIPAA “per diem” (or per day) limit are taxable. The HIPAA daily rate for 2019 is $370 per day (compared to $360 per day for 2017 and 2018).
For example, suppose a 65-year-old woman purchases an annuity with a long-term care rider for $100,000 that provides an immediate benefit of approximately $300,000 (or $137 per day for up to six years) . If she became eligible for long-term care benefits the following year (at age 66), she would receive approximately $141 per day, as the benefit increases over time based on contractual guarantees. (It’s important to note that not all insurance companies operate the same way.) Since this amount is less than the HIPAA daily rate of $370 per day, any benefits paid would be non-taxable!
With a reimbursement policy, you would only be “reimbursed” for your actual long-term care costs, rather than receiving a fixed amount, like an indemnity policy.
Using the same example above, one would need to know how much the woman is spending to be reimbursed. Let’s say his costs were $120 per day and his daily maximum is $141, the $120 would be paid out and the remaining $21 would be returned to the pool.
It is imperative to note that while some may prefer the refund policy in order to extend their benefits, the indemnity policy is simpler in many cases, and the excess can be used for other major non-medical purchases.
What is the difference between a chronic illness rider and a long term care rider?
A chronically ill rider is subject to IRC § 101(g) to help pay for ongoing qualifying events. It’s similar to a long-term care rider where two out of six activities of daily living (ADLs) or severe cognitive impairment can trigger benefits, and a licensed healthcare provider — such as your doctor — will need to certify. However, chronic disease insurance policies only pay when the illness is likely to last the rest of your life, not temporarily.
For example, a 70-year-old person with a stroke would receive long-term care benefits under a long-term care rider, but not necessarily a chronic condition rider. In many cases, one stroke would not be enough to receive benefits under a chronic condition rider. If this person is deemed to have recovered, the chronic illness insurance policy will not pay any benefits (table below).
If it is a stroke from which they will never recover and it is considered “permanent”, the chronic disease insurance policy will pay benefits according to the contract.
It is extremely important to know that a chronic illness rider is not a long term care facility. I have witnessed many instances where financial advisors and insurance agents have confused the two and misrepresented a chronic illness rider as a long term care rider.
Let’s review the differences between a long term care rider and a chronic illness rider:
|Long Term Care Rider||Critical Illness Rider|
|IRC §7702B||IRC §101(g)|
|Classified as long term care coverage||Not classified as long term care coverage|
|Pays temporary and permanent claims||Generally only pays for permanent illnesses where the condition must be met and likely to last the rest of the life of the insured|
|Two types of policies: 1.) reimbursement; and 2.) indemnity||All are indemnity policies|
|Available on life insurance and annuity policies||Available on life insurance and annuity policies|
Pension Protection Act 2006
The Pension Protection Act 2006, which came into force in 2010, opened up a huge tax-efficient opportunity. For those with life insurance or annuity policies with substantial taxable earnings, they can make a tax-free 1035 exchange for a new life insurance or annuity with a long-term care rider.
Here are the types of policies that can be transferred tax-free to a new policy:
|Type of policy transferred to||Life insurance||Annuity|
While a life insurance policy can be exchanged for both another life insurance policy and an annuity, an annuity can only be transferred to another annuity.
For example, a 70-year-old man has an existing annuity that was purchased for $100,000 and is now worth $200,000. He or she can make a 1035 exchange to a new annuity with a long-term care rider that guarantees $600,000 in benefits. The person would pay no tax on the exchange…and could potentially receive all those long-term care benefits tax-free.
When considering a lifetime investment for long-term health care benefits, remember to take all of these factors into consideration. And make sure you understand the differences between a chronic condition rider and a long-term care rider, because confusing the two could lead to a costly mistake.
Founder and President, Dias Wealth LLC
Carlos Dias Jr. is a financial advisor, speaker and president of Dias Wealth LLC, in the Orlando, Florida area, providing strategic financial planning services to business owners, executives, retirees and professional athletes. Carlos is a nationally syndicated columnist for Kiplinger and has contributed, been featured or quoted in over 100 publications, including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street Journal, US News & World Report, USA Today and many more. others. He has also been interviewed on various radio and television stations. Carlos is trilingual, fluent in Portuguese and Spanish.