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How life insurance can pay for long-term care

by Maryalene LaPonsie

MetLife Mature Market Institute's 2011 survey of senior care costs estimated the annual cost of a private nursing room at $87,235. Long-term care costs can be expensive, so how can you or your elder afford those costs? Selling a life insurance policy is one way.

 

 

According to the Department of Health and Human Services, 40 percent of seniors older than age 65 will need long-term care. Prudential life insurance company puts that number at closer to 70 percent. Either way, the reality for many Baby Boomers is that they will not be able to live independently forever. With the MetLife Mutual Market Institute estimating the annual cost of a private nursing home room in 2011 at $87,235, the real question becomes: how are you going to pay for that care?

How to pay for long term care

One way you are not going to pay for long term care is through Medicare. The government's health insurance program for seniors doesn't provide coverage for assisted living or nursing homes. Another government program, Medicaid, may provide coverage but only after you have depleted most of your savings and liquidated assets.

Rather than depend on the government to pay for long-term care, it may be better to plan for the expense yourself. While some may be able to save enough to pay out of pocket, a more affordable option may be to purchase long-term care insurance. Private health insurance rarely covers long term care, and a separate policy is needed for this coverage. Purchasing long-term care insurance when you are younger is generally the best way to keep premiums low.

However, if you are already older or facing the prospect of placing an older relative into a nursing home, it may be too late to purchase long-term care insurance. Fortunately, there are other options available. One possibility may be to take out a reverse mortgage, but that generally results in the loss of that piece of property. Less burdensome may be the sale of a life insurance policy.

Selling life insurance to pay for long-term care

For some seniors, their life insurance policy may be their biggest asset. There are two ways to sell a life insurance policy and pay for long term care:

  • Viatical settlement: A viatical settlement allows an individual to sell their life insurance policy to a third party. The policyholder may receive anywhere from 50-80 percent of the death benefit, depending on the terms of the sale. The insured individual gives up ownership of the plan, and any future premium payments are made by the buyer. Upon death, the benefit goes to the third party. Money received from a viatical settlement may be tax-free.
  • Life settlement: Healthy seniors may be able to sell their life insurance for the full amount of its present value using a life settlement. To be eligible for a life settlement, female policyholders must be older than 70 years of age and men must be older than 74. A life settlement may also be available in certain circumstances in which an individual's life expectancy is less than 12 years. Money received from a life settlement may be taxable.

Life insurance can provide a safety net for those who need long-term care but find they can't afford the bill. It protects assets while providing a significant source of income. Before signing any settlement agreement, be sure to consult with a finance professional about the potential tax ramifications.