A long-term care rider is a living benefit on a life insurance policy that lets you access a portion of the policy's death benefit every month to pay for long-term care expenses. To exercise the benefits this rider offers, a medical professional will need to certify that the policyholder can't perform at least two activities of daily living or that they need substantial supervision to protect their health and safety because of a cognitive impairment (such as Alzheimer's or dementia).
Long-term care riders on life insurance policies can be more affordable than standalone long-term care policies.
If you use your rider's long-term care benefits, your policy's death benefit will go down proportionately.
If you don't use your long-term care benefits, your heirs will get the full death benefit from your life insurance policy, minus what you owe on any policy loans.
Understanding Long-Term Care Insurance and Riders
Gaining an understanding of long-term care riders involves first taking a look at long-term care (LTC) insurance. LTC insurance is expensive. The average annual premium charged by leading long-term care insurance companies as of January 2019 was $2,050 for a single male, $2,700 for a single female, and $3,050 for a couple, according to calculations by the American Association of Long-Term Care Insurance. These premiums are for 55-year-olds in good health, and the policies provide a lifetime benefit of $164,000 when the policy starts. That benefit grows to $386,500 by age 85. If you apply when you're older, if your health is not as good, or if you want more benefits, premiums go up.2
Because of the cost—and perhaps because people don't know the coverage exists or why they might need it—most don't purchase LTC insurance. Only 350,000 Americans carried some type of LTC insurance in 2018, and only 16% of those had standalone policies, the American Association of Long-Term Care Insurance reports. The other 84% had a long-term care benefit attached to a life insurance policy or annuity.
Medicare does not cover long-term care because help with activities of daily living is not considered medical care. Medicaid does provide coverage for long-term care needs that are severe enough to require nursing home care. But you must meet your state's requirements for Medicaid eligibility, which include having a low income and limited assets.
The high cost of care
The annual cost of long-term care depends on where you live and what type of care you want. Nationwide, the median is $19,500 per year for adult day healthcare, $48,612 for a private one-bedroom unit in a community or assisted living facility, $52,624 for a home health aide, and $102,200 for a private single room in a nursing home. These figures come from a 2019 study by long-term care insurance provider Genworth. Monthly, the median cost is $1,625 for adult day healthcare, $4,051 for assisted living, $4,385 for a home health aide, and $8,517 for a private single room in a nursing home.
Life insurance laws are not the same in every state, so long-term care riders will vary by state and by insurance company.
To cover these potential costs, you can add a long-term care rider to a life insurance policy. The big advantage of choosing this option over a standalone policy is that if you don't use the care benefit, the policy pays a death benefit. Standalone policies can feel like a waste if you never file a claim.
A long-term care rider is not available with every life insurance policy or from every insurance company. It may be available with whole life, universal life, indexed universal life, or variable universal life (VUL). A few companies that offer it are AXA Equitable, Guardian, John Hancock, Lincoln Financial Group, MONY Life Insurance Company of America, Nationwide, and State Farm. This list is not exhaustive, but it does help illustrate that long-term care riders are widely available.
How Long-Term Care Riders Work
Long-term care insurance—whether a standalone policy or a rider—covers the cost of care when an individual needs help with two or more activities of daily living (ADL) or has severe cognitive impairment that requires constant supervision to prevent them from harming themselves or others. The activities of daily living are bathing, dressing, toileting, continence, transferring, and eating. Someone might need help with these activities after an accident, stroke, major surgery, advancement of a chronic illness, or other serious condition.
Similar to a standalone long-term care policy's requirements, a long-term care rider may have a 90-day waiting period before benefits will be paid. The payments you receive through the long-term care rider are subtracted from your policy's death benefit, and your beneficiaries will receive a reduced payout when you die. If your life insurance policy has cash value, activating the long-term care rider may reduce the policy's cash value.
The long-term care rider will have a maximum monthly benefit. You might, for example, be able to receive 1%, 2%, 3%, or 4% of your policy's death benefit per month, The rider will also have a maximum lifetime benefit. One policy we examined, for instance, provides coverage of anywhere from $100,000 up to the policy's full death benefit.
Some policies let you use the benefit to pay for care from family members, while others require that you receive it from licensed healthcare providers. Even if family care is allowed, you may need to submit a plan of care from a licensed healthcare professional and have it re-certified annually for the rider to cover your care.
Here are a few other benefits of long-term care riders. Some riders let you use your long-term care benefits outside the United States. Another feature that can save you headaches is a rider that doesn't require you to submit bills or receipts for your care. Some policies provide a guaranteed minimum death benefit even if you exhaust your policy's long-term care benefits. Long-term care benefits are usually not taxable.
Options forpaying for long-term care are changing. Insurers are offering more products, more affordable price points, and more flexible benefits. A long-term care rider on a whole or universal life insurance policy is one way you might choose to protect your retirement funds and your family members from long-term care costs and the burden of unpaid family care.