Archive for June, 2016

Turned Down For Long Term Care Insurance?

June 28, 2016

I recently found a life insurance policy with a built-in chronic care benefit that may be appropriate for some people who cannot qualify for traditional long term care insurance.  Understand that life insurance underwrites, or does a risk assessment, for mortality risk (likelihood of dying anytime soon) while long term care insurance underwrites for morbidity risk (likelihood of needing long term care services anytime soon).  This policy only underwrites for mortality risk.  So if someone qualifies for life insurance but not long term care insurance, they could be approved for this policy.

The two chronic care benefit triggers are similar to, but not exactly the same as, those of a long term care insurance policy:

  1. You are unable to perform at least two of the six standardized Activities of Daily Living (bathing, eating, dressing, toileting, continence, transferring) for 90 consecutive days.  Long term care insurance policies require an expected 90 day need for assistance.  Or:
  2. You require substantial supervision due to a severe cognitive impairment.

How does it work?  The chronic care benefit is paid as an acceleration of the life insurance death benefit.  You start with the lesser of $1,000,000 or 80% of the life policy specified amount (initial death benefit).

Then the amount that can be accelerated is reduced by the actuarial discount and a $100 processing fee.  For someone with a remaining life expectancy, as adjusted to reflect the need for care, of say four years, the discount would be about 18%.

Thus 80% of  $500,000 = $400,000, less 18% = $328,000 less $100 = $327,900.  You now have $327,900 cash available with no restrictions on how you can spend it…you can use it to pay for long term care expenses, but you don’t have to.

In the above example, will you receive a check for $327,900?  And what about your initial life insurance death benefit (specified amount) of $500,000?

  1. You will receive a check, but it will be for a maximum of the IRS per diem limit ($340 per day or $124,100 per year in 2016).  You will continue to receive checks for as long as you continue meeting one of the chronic care benefit triggers, and have not yet received the above acceleration example amount of $327,900.
  2. The life insurance policy death benefit will be reduced by the requested amount, not the net amount actually received by the policy owner.  Referring again to the above example, if the maximum permitted is 80% of $500,000 = $400,000 was requested: the death benefit (specified amount) would be reduced by, you guessed it, $400,000.  *Your new life insurance death benefit would be $100,000.  Because of the IRS per diem limitation, you would receive the $327,900 as a cash advance over a period of about 2.6 years.
  3. Run the numbers & you will see that the remaining life insurance death benefit plus the cash advance falls $72,100 short of the original $500,000 death benefit.  What happened?  In this example $72,100 was the cost of receiving a $327,900 cash advance early (before the death claim would normally have been paid).

Is this a good deal?  No it is not.  However: It may be the least bad way for someone who is uninsurable for long term care to get $327,900 cash plus a remaining death benefit of $100,000, all for a cost of about $6,100 per year.

The underlying life insurance policy*:  Female, age 55, standard non-tobacco rate class (not preferred), policy issued by a good insurance company.  Universal life, if paid each year the $6,100 annual premium keeps the policy in-force to age 100, no guarantee nor expectation of any cash value.  The premium is the absolute minimum needed for the age 100 guarantee.  That is why there is no cash value.

Finding a good alternative for someone who cannot qualify for long term care insurance is difficult.  This is one of the better choices and frankly, it is not very good.  It illustrates the importance of applying for long term care insurance now rather than later.  Please remember: We are all potentially one doctor’s visit away from a diagnoses that forever ends our ability to buy this most important coverage.  Don’t wait.  Apply for long term care insurance while you still can.


*Note: The above hypothetical life insurance policy values assume there have been no disbursements (policy loans, partial surrenders, or previous death benefit advances).


Disclaimer: Actual policy language, rather than the contents of this eNewsletter always takes precedence. Life insurance & long term care insurance policies vary widely from company to company & often within the same company.  Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice.  Consult your tax advisor or attorney for these matters.


© Raymond Smith, The Long Term Care Specialist, 2016