What is life insurance?

Life insurance is an essential provider of financial protection for dependents that are left behind when an individual dies. After an individual’s death, the financial support he or she provided to the family ends, even though, of course, the family's need for income continues. Most families will have an ongoing need for housing, transportation, medical care, food, clothing, and possibly education and day care. 

A life insurance policy is a contract between an insurance company and a policyowner, and it is governed by state law. Under the terms of the policy contract, the policyowner pays premiums in exchange for the promise of payment of a specified amount of money to a named beneficiary when the insured dies. The policy itself contains provisions specifying the rights and obligations of the parties under the contract. 

In addition to the above, life insurance has a number of other uses. It can be used to pay for one’s final expenses at death, and it can also be used to pay off a number of debts-- a home mortgage, automobile loan, credit card, or any other debt that may have accumulated, relieving family members of the financial burden. It can also be used to pay off estate taxes--both state and federal--and can also actually be used to create an estate.

Life insurance is also particularly useful during your life.When you buy cash value life insurance, you can receive certain lifetime benefits. Cash value life insurance policies include a potential accumulation of funds that can be accessed during your lifetime  (for example, for retirement savings or education savings) through loans or withdrawals. In addition, the cash value grows tax deferred, meaning you don't pay taxes on the increased value until you actually access the cash value, and even then the distributions may be subject to favorable income tax treatment.

What is long-term care insurance (LTCI)?

Long-term care insurance, or LTCI, is a contractual arrangement that pays a selected dollar amount per day for a selected period of time for skilled, intermediate, or custodial care in nursing homes and other setting, such as home health care. Because Medicare and other forms of health insurance do not pay for custodial care, many nursing home residents have only three alternatives for paying their nursing home bills: their own assets--either cash or investments, Medicaid, and long-term care insurance.

In general, long-term care refers to a broad range of medical and personal services designed to provide ongoing care for people with chronic disabilities who have lost the ability to function independently. The need for this care arises when physical or mental impairments prevent one from performing certain basic activities, such as feeding, bathing, dressing, transferring, and toileting--activities known as "activities of daily living," or “ADLs.”

Long-term care may be divided into three levels:

Skilled care  Continuous "around-the-clock" care designed to treat a medical condition. This type of care is ordered by a physician and performed by skilled medical personnel, such as registered nurses or professional therapists. A treatment plan is created, and it is usually implied that the patient will recover at some point.

Intermediate care  Intermittent nursing and rehabilitative care provided by registered nurses, licensed practical nurses, and nurse's aides under the supervision of a physician.

Custodial care  Care designed to help one perform the activities of daily living--such as bathing, eating, and dressing--that can be provided by someone without professional medical skills, but is supervised by a physician.

How is LTCI useful as a protection planning tool?

The risk of contracting a chronic debilitating illness--and the resulting catastrophic medical bills incurred--is considered by many to be one type of risk best passed on to an insurance company through the purchase of a LTCI policy. A number of factors can increase your risk of requiring long-term care in the future. For one thing, your health status affects your likelihood of incurring a long stay in a nursing home. Indeed, people with chronic or degenerative medical conditions (such as rheumatoid arthritis, Alzheimer's disease, or Parkinson's disease) are more likely than the average person to require long-term nursing home care. And because women usually outlive the men in their lives, women stand a greater chance of requiring long-term nursing home care. 

However, if you already have a primary caregiver, such as a spouse or child, your likelihood of needing a long stay in a nursing home will decrease, particularly if you're a man. Because the cost of long-term care can be astronomical and may exhaust your life savings, purchasing LTCI should be considered as part of your overall asset protection strategy.

How much does it cost?

Although purchasing LTCI seems to be the easy answer to the problem of escalating long-term care costs, the premiums for LTCI can be, depending on benefit levels selected, quite expensive.

Your yearly premium for an LTCI policy depends on a number of considerations, including your age when you purchase the policy, your health, the length of the coverage period (for instance, three years, five years, or lifetime benefits), the amount of the daily benefit provided, and whether you purchase inflation protection. When buying an LTCI policy, you must also consider not only whether you can afford to pay the premiums now but also whether you'll be able to continue paying premiums in the future, when your income may be substantially decreased.

Who should purchase LTCI?

During the "golden years," when income typically declines, the purchase of LTCI should be carefully considered. People with significant discretionary income and substantial resources to protect for spouses, children, and other loved ones should seriously consider purchasing LTCI. Individuals with modest resources (for example, less than $50,000 net worth) may find the premiums unaffordable, and may qualify for Medicaid by spending down their assets and/or engaging in a little Medicaid planning.

How much coverage is enough?

Insurance protects against an event that might happen in the future. Therefore, buying enough protection is important, but affordability must also be considered. In terms of cost, you need to consider the amount of the daily benefit you want to purchase and also the length of the benefit period.

Daily benefit  Most policies will let you choose your amount of coverage, typically running anywhere from $40 to $150 or more per day. Of course, the greater the daily benefit and the longer the benefit period, the more the policy will cost. Also, note that the cost of nursing home care varies greatly from one metropolitan area to another, so you need to know where you'll be living out the remainder of your years. 

Note: Consumers should generally buy enough coverage to cover 50 to 100 percent of nursing home costs. If you don't plan on using your own income to supplement, you should buy enough insurance to cover 100 percent of the nursing home costs.

Length of benefit period  When purchasing LTCI, you'll be asked to select a benefit period. Benefit periods generally range from one to six years, with some policies offering a lifetime benefit. You'll want to choose the longest benefit period you can afford. If you can't afford a lifetime benefit, consider choosing a benefit period that coordinates with the look-back period for Medicaid, which is five years.