Can a life insurance policy be used to pay for long-term care, if someone finds themselves in assisted living, gets a medical diagnosis that makes it inevitable, or is simply planning ahead? It can…. With caveats.
Cash-value life insurance policies
One of the most exciting things about life insurance is the ability to purchase a cash-value policy, which is a tax-advantaged investment asset that allows the insured to withdraw cash from the policy once it’s accumulated enough value.
Unlike a term life insurance policy which has no cash value and expires at the end of its term or once a death benefit is paid, universal life insurance policies grows in cash value as payments accumulate. Check the specific policy to confirm details and requirements, but any policy with cash value typically allows withdrawals of cash that can be used in any manner the insured sees fit, including long-term care.
Which kind of life insurance policy is best? It depends on your budget, age and the benefits you’d like included. Different policies may have certain similarities, such as whole life insurance versus universal life insurance, and even the same “type” of policy may vary from different providers.
To fully understand the differences and make an educated decision, be sure to speak with several life insurance specialists and take time to learn the basics of the different policies before deciding.
How does universal life insurance work?
There are five or six different types of life insurance policies. Universal life insurance (or a universal variable policy) can be an excellent choice for those seeking a policy that covers the costs of long-term care.
According to Josh Freegard at Sun Health at Home, a percentage of the monthly premium for a universal life insurance policy goes toward the death benefit, but the bulk of it accumulates in the policy growing at a fixed or variable rate of return.
“Say you are paying $100 a month for the policy. Twenty dollars of the premium will cover the cost of the insurance, with the remaining eighty dollars going into a cash bucket growing at a tax-deferred interest rate,” he says. “It can be a good idea.”
Over time, earnings from the policy should cover the monthly premiums as it continues to perpetually grow, so the insured won’t have to continue making the monthly premium payments out of their own pocket.
Plus, if the economy dives, the “cash bucket” won’t be lost. Earnings might stutter if the policy hits the floor of zero interest but unlike an IRA, stocks or most other forms of investments, the policy holder will not have their entire investment suddenly at risk. On the flip side, there may be a cap on the interest rate that can limit performance.
Spending your universal life insurance policy for long-term care
Since universal life policies set aside a certain amount of the monthly premium toward the investment component each month, it takes time to build enough money in the account to qualify for a cash withdrawal. It’s typically something that should be created and nurtured long before a need for long-term care might arise.
There are also fees for accessing the account, often within a ten-year window. Each year, the penalty is reduced as you get closer to the ten-year mark. The idea is not to create the universal life policy with the idea of taking out money, it’s intended for longevity purposes. Once the policy has a exceeded the specified time window and carries a sizable cash value, however, that money can be withdrawn and spent like any other cash expenditure.
Can you use it to pay for the entrance fee to join a continuing care at home (CCaH) program like Sun Health at Home, which is intended to put members and their families at ease when it comes to the cost of long-term care? This depends on the total cash value available to spend, the size of the entry fee and other circumstances. It may be more appropriate to use the policy to cover monthly expenses, allowing the principal balance in the policy to continue growing, but this should be discussed in a comprehensive evaluation. If you’re considering a CCaH program, their in-house financial specialists typically provide the evaluation and financial recommendations at no charge.
Interested in being proactive about your future long-term care needs? Reserve your spot now at our free, no-obligation discovery seminar to learn about continuing care at home and how it can protect you from the costs of long-term care, or call (623) 227- HOME (4663).
Sun Health at Home is the first CCaH program in the Western United States, and the only one available in Arizona.