In most people’s younger years they have a need for life insurance. This will help protect their loved ones in the event that they die early and are no longer around to provide an income to help support them. But as a person ages, they accumulate wealth, and they do not need the insurance quite as much as they did when they had a family that would be left with nothing if they were to die. Subsequently, as a person ages, paying for long term care becomes a big financial consideration. That wealth that a person has been working their whole life to accumulate could disappear quickly if they need to spend even just a few years in a nursing facility. In order to prevent having to pay for their long term care out of pocket, many people are purchasing long term care insurance. What some people do not realize, is they can use their life insurance to fund their long term care insurance.
There are three basic ways to pay for long term care using life insurance. For those with a whole life policy they can use the dividends that the policy receives each year to pay the premiums on long term care insurance. Likewise, they can also use the cash value that the policy has accumulated to either pay premiums, or pay for the cost of care directly. Using an accelerated death benefit, especially when the insured has a limited life expectancy, can also be used to pay for the cost of care. Each method has its benefits.
A whole life policy should earn dividends each year. That is one of the key selling points to these policies. For those who do not need their whole life policy to grow quite as much, they can do a 1035 exchange and have the dividends pay, or offset, the premiums on their long term care policy. While taking dividends in cash is usually taxable, after the amount collected exceeds the premiums paid, there are special provisions where they are not taxable. Using them to pay long term care premiums is one of those provisions.
Using Cash Value
The policy owner can also do a 1035 exchange using the cash value of the policy itself. This option is not as popular since any time some of the policy is cashed out, the death benefit will be lowered. For those who need just temporary care in a nursing facility, they may be better off borrowing the money from their cash value and paying for the care directly. This method will keep the death benefit intact, and avoid taxation on the amount withdrawn. When the insured passes away, the loan is paid back with the death benefit and the beneficiaries collect the rest.
Using an Accelerated Death Benefit
When a person is diagnosed with a terminal illness, and given a limited time to live, they have the option of selling their life insurance policy and collect an accelerated death benefit. There are companies that will pay the death benefit (minus their fees) in exchange for becoming the owner and beneficiary on the policy. The insured then collects the death benefit early, and can use it to pay his or her long term care expenses. This method may end up being taxable, so it is not always a very popular way to pay for the care.
Using multiple lines of insurance will help an individual better prepare for his or her future. By utilizing a 1035 exchange, he or she can get around the tax implications that come with cashing in a whole life insurance policy. Paying for long term care with life insurance can help them get the care they need later in life, without huge out of pocket expenses. There are ways to use early in life planning to benefit later in life planning. If you are at the stage where long term care insurance is on your radar, talk with your advisor to determine the best way to pay for it.