There are several ways to use different types of insurance to help pay for care.
Those who own life insurance should check existing policies, including riders and endorsements, or consult an insurance agent or company to find out whether coverage can be converted to help pay for care. Beware, however, that most insurance companies require that policyholdersmust be diagnosed with a shortened life expectancy to exercise these options.
- Accelerated death benefits. Such provisions may allow policyholders to collect from 25% to 100% of the death benefit in an early payment, either in a lump sum or monthly allotments. The payout is usually 50% to 80% of the policy’s face value and requires a life expectancy of 2 years or less.
- Secured loans. It may be possible to negotiate a loan secured by the future benefits.
- Cashing out. In some cases, it may be prudent to simply cash out the policy for the amount of its current surrender value.
- Life settlements. These allow insureds to sell policies to companies that pay them a percentage of the policies’ face value in a lump sum in exchange for the right to collect the balance at death. However, the payment may be as little as 10% of the policy’s face value, depending on the policyholder’s life expectancy; most companies require an estimated life expectancy of 15 years or less. A specific type of life settlement, a viatical settlement, pays a higher amount, but is tailored to terminally ill policyholders, generally with life expectancies of 5 years or less.
Some potential drawbacks: The amount received from selling an insurance policy will be counted as an asset when applying for Medi-Cal and some other financial assistance programs, which may disqualify some people for benefits. And while viatical settlements are generally tax-exempt, life settlement payouts are usually treated as income or capital gains.
Finally, surviving beneficiaries named in the policy will no longer get any money once the policyholder dies, which may be a concern for those who count on this asset in their estate planning.
To prevent fraud, California imposes tough legal controls on life settlements, requiring all those dealing in them to be specially licensed. Check the California Department of Insurance’s list of life settlement providers.
For more information on using insurance proceeds to pay for care, contact the California Department of Insurance, which operates a consumer hotline at 800.927.4357.
An annuity is a contract in which an insurance company makes a series of payments to an insured in return for a premium. Basically, it acts as a savings account, with the company as the bank. Within this simple definition, contracts can vary a lot, so annuities can be risky if you don’t fully understand the controlling clauses and conditions. In some arrangements, survivors can be designated to receive income after an insured’s death.
Annuities come in two types:
- Deferred annuities, by far the most common, in which premium payments are held to accumulate interest for a number of years until periodic payments are made. One possible advantage is that income tax on the money is not due until distributions are received. Some deferred annuities are fixed, guaranteeing a minimum interest rate. Others are variable, allowing the insured to choose among investments such as stocks, bonds, or money markets and receive a varying rate of return.
- Immediate annuities are paid for with a lump sum premium and the company begins paying periodic payments at once.
Some potential drawbacks: Many annuities contain surrender charges — payments tacked on for withdrawing money within a period after purchase, usually 6 or 8 years, but sometimes as long as 10 years. This often makes them a poor choice for seriously ill or older people seeking a source of paying for care, since immediate care costs can quickly mount, and their longer-term needs are likely to be uncertain. As added protection against confusion, California law requires that annuity contracts sold to seniors must contain a disclosure about the surrender charge period.
Long Term Care Insurance
Long term care insurance may help cover the cost of care, both at home or in a facility. Policies usually require paying a monthly premium based on the individual’s age and health condition when purchased. Insurance payments begin only after a waiting period or according to the particular rules defining “need”set out in each policy. Many of these policies pay only for care lasting a few months or less and are used to supplement Medicare coverage.
Individuals in poor health or already contemplating entering a nursing facility will not be good candidates for such coverage. And those who receive Social Security benefits or expect to have little or no retirement savings will likely qualify for other financial help with care, through Medi-Cal or other programs, and may also not be fitting buyers.
Be attuned to labels. In California, all long term care policies must be labeled according to the type of benefits that will be paid:
- Home Care Only extends coverage to home health care, adult day programs, personal care, homemaker services, and hospice and respite care.
- Nursing Home and Residential Care Facility covers care in a nursing home or residential care facility.
- Comprehensive pays for care at home, in community-based facilities such as adult day programs, and in nursing homes and residential care facilities.
Because of potential complications and limitations of this coverage, it is important to proceed carefully when purchasing it. If you have an insurance agent you trust, consult him or her about coverage options — or ask for referrals from friends and associates who have had satisfactory experiences in securing coverage.
A program sponsored by the California Department of Health Services in cooperation with a number of private insurance companies offer policies vetted to meetstate law requirements. For details, contact the California Partnership for Long Term Care.
For more information and help with understanding and comparing insurance policies: