Accelerated Benefits

The cost of long term care is significant, and little is covered by Medicare or other health insurance policies. There are several ways to pay for these costs. You can use personal savings while they last, and Medicaid benefits when your assets are exhausted. Long-term care insurance is another alternative, but there are also ways to use life insurance to cover care costs.

If you are still insurable, and my colleagues in the insurance industry tell me many people under age 80 could still get some kind of insurance, you may want to purchase additional insurance.

This insurance could be a long-term care policy, or it could be a life insurance policy with accelerated benefits. In a life policy with accelerated benefits, the beneficiary has an option to receive benefits during his or her lifetime as an alternative to a death benefit. The advantage of accelerated benefits products is that some payout will be received, either for care needs prior to death, or as a death benefit. The newest accelerated benefits products are single premium life policies with long-term care riders or linked-benefits products. If it is used to pay for long-term care costs, the payout may be exempt from income taxes, effectively creating a tax shelter as well providing insurance.

You can find companies who will purchase your existing life insurance policy for a discounted amount prior to death. These are called viatical settlements. Viatical settlements have increased in popularity since recent changes in tax law exempted most payments from income taxes. Viatical settlements are often only available to people who are near death, but they potentially provide a way to finance catastrophic end-of-life care costs.

Several insurance agents have contacted me recently about new products, with names like “elder settlements”, which offer a discounted payment for a purchase of a life policy, regardless of health status. The advantage of these products, they say, is the ability to get cash from a life insurance policy which is no longer needed, which may be preferable to letting it lapse.

There are several things you will need to determine about any policy or program you consider. First, all companies must be licensed to do business in your state. Check with the department of insurance. Many of them have lists of approved insurers and policies, and good consumer information guides, as well.

Second, consider the income tax implications of any transaction. Some of these payments may be exempt from income taxes and others will be taxable. Confirm this with your accountant prior to making any commitments, and include this factor in your calculations.

Third, before selling an existing life policy, investigate your other alternatives, including taking out a policy loan, using the policy as collateral on a bank loan, or adding an accelerated benefits rider to the policy.

Fourth, calculate all the costs and all the payouts, throughout the life of the policy, for each alternative you investigate. Compare the net expected return of all these options to your net expected return from investing the money you would have spent on premiums and fees.

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