Life or Long Term Care Insurance: Which Is Better?


Like every other blogger, I get spam on a consistent basis.  Most of what I get is from life insurance brokerages wanting me to sell their life insurance.  I did not realize their were as many of them as there are.

Today I awoke to another spam message.  I have not asked this company to email advertisements, yet somehow I got on their mailing list and cannot get off.

This morning they sent a message urging me to recommend my clients to use “Combo” Life insurance to meet their Long Term Care insurance needs.  They listed several reasons why the strategy may be of interest to other people.  I agree with most of their reasoning.

I disagree with the idea that one solution is suitable for everyone.  One of the major reasons that I became an independent agent after 17 years of being a “captive agent” was to be able to use the appropriate type of insurance to solve specific needs.  I have seen scores of insurance agents try to convince the public that Life insurance will do more than it is intended to do.  Either they are too lazy to learn the other types of insurance that exist or they are motivated more by the commissions they earn on Life insurance than they are looking out for the interests of their clients.

Nothing is better than Life insurance to meet Life insurance needs.  The problem is that insurance agents are under so much pressure to meet their Life insurance sales quotas that they can be tempted to try to make Life insurance do more than it was meant to.

Insurance policies that combine both Life and Long Term Care benefits can be very enticing.  Like politicians, insurance agents do not tell the whole story behind them.  They tend to only tell the positive things.  By the time you learn the negative, they are long gone and have spent their commission.

In this post I want to share some of the negatives behind many “Combo” plans.

EITHER/OR

Many insurance agents will not tell you that the benefit in most “Combo” plans is not available for both long-term care and death.  When you use the benefit for your long-term care expenses, the amount that is paid to your care giver is subtracted from you future death benefit.

I have a client who has a $300,000 Life insurance policy.  That is the amount she wants to leave for her heirs to pay off her $290,000 worth of debt.  It also gives them $10,000 for her funeral expenses.

If she were to use $200,000 for long-term care expenses, her heirs would only get $100,000.  While there would be enough money to pay for her funeral, there would not be enough money left over to pay off her debts before probate.  Her family would have no choice but to sell off $190,000 of assets, within 90 days to pay off her debts.

NON-PARTNERSHIP

The Deficit Reduction Act of 2005 authorized state governments to create “Partnership Plans.”  At this time, about 39 states have implemented “Partnership Plans.”  These type of plans do somethings that most combination Life and Long Term Care insurance plans do not.

First, “Partnership Plans” allow you to shelter your assets from Medicaid’s “Asset Test.”  For every dollar of long-term care that is paid by a qualifying “Partnership Plan,” one dollar of your assets is not counted by Medicaid if you need their help in the future.

If you have a qualifying Long Term Care insurance policy, you can shelter all of your life’s savings and avoid the necessity to “spend down” your assets to meet Medicaid’s “Asset Test.

I have looked at several “Combo” insurance plans.  So far, I have not found one that qualifies as a “Partnership Plan.”

Secondly, most Medicaid programs have an “Estate Recovery” right.  When you apply for Medicaid you will be told that your spouse can remain in your home as long as she lives.  That is correct.  What is often not made clear is that Medicaid will place a lien on your home.  When you spouse dies, Medicaid has first claim against the equity that is in your house.

If your goal is to leave your estate to your children, that may not be possible.  Once again, this is a reason to have a “Partnership Plan.”  You are allowed to shelter your estate with a “Partnership Plan.”  For every dollar that is paid by a qualifying “Partnership Plan” towards your long-term care expenses, Medicaid cannot impose their “Estate Recovery” rights if they have to help with your long-term care expenses in the future.

SUMMARY

I do not want to leave you with the wrong idea.  “Combo” Life and Long Term Care plans can be useful, when they are used correctly.  For people who retire with less than their state’s Medicaid’s allowed assets, they are a great way to allow them to keep their freedom of choice.

However, “Combo” plans are not always appropriate.  Those who have been able to accumulate a sizable amount of retirement savings are better off separating Life and Long Term Care insurance.

Unless there is a specific need for Life insurance, I typically recommend $10,000-$25,000 of whole life insurance to be a sufficient amount to pay for final expenses.

I would rather see a client, who has $30,000 or more in assets, spend their insurance money on Long Term Care insurance that qualifies as a “Partnership Plan.”

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