- 4-Minute Article
- Dec 29, 2017
How Life Insurance Can Help Cover Medical Costs in Retirement
Learn how some permanent life insurance policies offer optional features that can help pay for long-term care or related medical services.
Planning for future healthcare expenses is one of the most important parts of a retirement plan. Unlike other costs that remain relatively stable during a long retirement, non-recurring medical costs, such as surgery or nursing home care, tend to increase with age.1
In particular, it’s estimated that 70% of 65-year-olds will need some form of long-term care during their lifetime2 — a type of professional assistance required when illness or disability makes it difficult to perform “activities of daily living” (ADL). The six most common ADLs are eating, bathing, dressing, toileting, transferring (walking to/from a bed or chair), and continence.
Costs for this assistance range from roughly $3,000 or more per month for a home health aide to $7,698 for a private room in a nursing home.3 Traditional health insurance doesn’t cover long-term care services. Likewise, Medicare Part A only covers certain services delivered in skilled nursing facilities, and only for up to 100 days of inpatient care4 And Medicaid only covers nursing home care for individuals who meet strict limits on income and assets. States have different financial requirements for Medicaid eligibility, but most use the guidelines set by the Supplemental Security income program.
Fortunately, there are other options that can help cover the cost of potential medical expenses. Some permanent life insurance policies offer optional features (known as riders) that provide tax-free money to help pay for long-term care or other related medical services. These riders can be added to the policy for a fee, and can help cover a range of health-related costs.
A long-term care (LTC) rider works by accelerating a portion of a permanent life insurance death benefit to pay for home healthcare, assisted living, nursing home, adult day care, and similar services. LTC benefits are paid when the insured person is unable to perform at least two of six ADLs, typically due to conditions such as Alzheimer’s or medical events like a stroke. In addition, the condition must exist for at least 90 days. The protection is there if needed, but if not, the policy’s cash value remains untouched to help fund future retirement expenses or to provide the policy’s beneficiaries with an income tax-free death benefit.
How coverage is provided:
The rider typically requires the policyholder to pay their long-term care bills out of pocket and then submit documentation to get their costs reimbursed, but some LTC riders disburse the funds in advance. LTC riders typically only cover medical expenses related to the covered condition.
A chronic illness (CI) rider accelerates a portion of a permanent life insurance policy’s death benefit to help cover expenses that arise from becoming permanently incapacitated by a chronic illness, such as Alzheimer’s, a brain injury, or neurological disorders. The benefit is triggered when the insured person is unable to perform at least two ADLs, but if the chronic illness coverage isn’t used, the policy’s cash value remains intact for future needs or to pay a death benefit. CI riders typically only cover conditions that are permanent and non-recoverable.
How coverage is provided:
Unlike many LTC riders, the funds are typically disbursed in advance to the insured person and can be used to pay medical or non-medical expenses.
A terminal illness rider can be part of a permanent life insurance policy or an optional rider added at the time of initial purchase. It enables the policyholder to collect a portion of their life insurance benefit to pay for costs associated with a terminal medical condition.
The benefit is triggered if the policyholder becomes terminally ill, usually with a life expectancy of 12 or 24 months. Upon receiving the diagnosis, an individual receives a percentage of the total death benefit as determined by the terms of the policy.
How coverage is provided:
Terminal illness riders provide funds in advance, and the amount distributed is deducted from the policy’s final death benefit. The money can be used to pay for hospital bills, medications, treatments, or non-medical costs.With each of these three riders, the benefits are not required to be repaid. Instead, the amount paid in advance is deducted from the policy’s final death benefit. However, for terminal illness riders and some chronic illness and long-term care riders, individuals must continue making monthly policy payments while receiving benefits.
Because of the differences among these coverage options, it’s important to understand and compare the features and considerations of each rider. The details on payouts, covered conditions, and other requirements also can vary from insurer to insurer. A financial professional can help navigate these and other forms of coverage and identify the type that best meets your needs. Putting a plan in place now for future healthcare expenses can provide peace of mind and help protect your retirement from the impact of unexpected medical bills.