My friend Don Quante, author of the book, “Don’t Go Broke in a Nursing Home,” said to me recently, “May I ask you a question? Do you have the old kind of life insurance or the new kind? What’s the difference? Well, the old kind of life insurance only pays you a benefit after you die, and the new kind pays you tax-free cash while you are alive.”
If you qualify, you may be able to accelerate the tax-free face amount into long-term care (LTC) benefits under the chronic illness rider. In addition, the policy will provide tax-free cash if you have a terminal or critical illness.
The old type of life insurance requires that you die so that your heirs enjoy the payoff. Ben Feldman talks about this old kind of life insurance with phrases like, “When you walk out, the money walks in.”¹
The new kind of insurance is available to you while you are alive. There is a tax-free pile of cash waiting there for you to help pay for long-term care costs and may even provide tax-free cash for critical-type illnesses. Now you don’t have to die to cash in on your hard-earned money.
Let’s consider the Smiths. They are a 50-year-old couple that pays for $1 million of term life insurance on Mr. Smith. They are interested in having his insurance be there for 20 years and also cover lifetime threats like LTC costs, terminal, critical and chronic illness. If he replaced the old kind of life insurance with the new kind, he may also qualify, at age 65, for $12,500 per month of LTC benefits. If he died while owning the policy, he would pass on a $1 million death benefit of tax-free cash to his heirs.
In addition, many of the term policies with the chronic, critical and terminal illness riders allow you to convert the riders if you convert the term insurance to permanent insurance. The new kind of term life insurance has riders for terminal, critical and chronic illness. These new policies are designed to pay Mr. Smith while he is living if he is unable to perform two of the six ADLs, (activities of daily living, such as eating, dressing, bathing, transferring, toileting or continence).2 This 20-year level term policy might die before Mr. Smith does. Although the 20-year level term cost is approximately $3,500 per year, he might want to look at the option of purchasing a guaranteed universal life product with a cash value designed to zero out at age 100.
The average cost of a nursing home is now $83,000 per year and rising at a rate that exceeds inflation.3 So by the time the Smiths get to their 70s and have a long-term care need, they may be looking at an annual cost of $181,000.4 The $1 million policy may provide for more than six years of nursing home care 20 years from now when Mr. Smith is 70.
In his book5 (page 67), Quante says, “Until recently, the thought of using a life insurance policy to pay for long-term care expenses was unthinkable. However, with the first baby boomers reaching the milestone of age 65 on Jan. 1 of 2011, insurance companies have begun offering long-term care coverage as a rider on term life policies as well as whole life and universal life policies.”6
Consult with a tax advisor for the tax-free status of any of the benefits listed in this article