Term Life Insurance And Estate Planning?
Posted August 12, 2009 – 4:17 pm in: term life insuranceCan term life insurance be used in place of long term care insurance? For instance, lets say a person is 55 yoa and in generally good health. Instead of buying long term care insurance, how about buying a term life policy for 250-300k. Should nursing home care become necessary, available funds for care costs, then upon death, survivors are “reimbursed” via the term life death benefit. It seems to me long term care insurance may or may not be used, and if not, the money paid for premiums is “wasted”. On the other hand, everyone dies, so nursing home or no nursing home, the death benefit will one day be paid. What say you?? Thanks in advance for offering your insight.
Tags: Estate, Insurance, Life, Planning, Term
4 Comments
Generally, you would not use term life insurance as a replacement for LTCi. Here’s why: What if the 55 year old person lives to 88 and then needs LTC? It would be less than 1% chance that the policy would still be in place, and if it was the premiums would be way too high (check the illustration to see the premiums for age 75, 80 and 85).
In this case (assuming there’s no other reason to have life insurance), this person would be much better off buying an LTCi policy. The average cost for a home is $70k and the average stay is 3 1/2 years. This does not include any care received at home, prior to entering a facility.
In today’s dollars, that’s about your $250k-$300k number. In 30 years, that $250k will only have the buying power of about $75k.
The premiums for a good policy (like NYLife’s) with inflation protection are about the cost of one years coverage spread until age 75 or 80. For example, $70k divided by 20 or 25 will let you calculate the estimated premium for $150 a day coverage for both at home and a facility.
No one wants to go to a facility, so the at home coverage is very important.
Now, consider the cost of Home Owners Insurance versus LTCi. (Let me say right now, that I am not proposing that anyone drop their Home Owners Insurance.) Let’s say you have a home worth $300k. The premiums are probably about $1,200 a year, depending on where you leave and such. The odds of having a catastrophic loss are 1:1200. In finance, one way to calculate the value of an option (which is what insurance is) is to do an expected value (EV) calculation. EV= Value ($300k)*odds of occurrence (.0001% for HOI), or $25. We buy HOI because the asset we are protecting to so large, even though the cost versus EV is high.
For LTCi, the odds of needed to go into a facility is 1:2 if you are under 65 and 7:10 if you are over 65. EV=$300,000 * 50% = $150k.
I doubt you drive up to your home and say, “Gee I paid for HOI and haven’t used it yet.” It’s the same thing with LTCi. You never say, “Gee I paid for LTCi and haven’t used it yet.” You NEVER want to use either one!
Now, if you buy the LTCi and it does not affect your life style very much (e.g., you can pay $3,000 a year without having to take a second job or food off the table), then you WANT the premiums wasted.
I could go on and on about all the reasons you should have LTCi. It’s truly is the biggest uncovered risk in families today.
I hope this helps. (BTW, I purchased my policy [without any ‘employee discounts’ at age 43.)
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Hope that helps, post back if need be- regards- Richard Man U
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No. Term life insurance cannot be used as LTC insurance. Go to the Personal Finance tab at Yahoo Finance and read about types of insurance.
That’s not how term insurance works. Term insurance only covers the risk of death. Term does not accumulate any cash value nor does it provide any long term care benefit. You cannot be “reimbursed” via the death benefit because term insurance is designed to only cover the risk of death for a specified period of time. There is no savings portion like there is with whole life.
For example: If you buy a 20 year term policy at 55 with a $500,000 death benefit, you are covered until age 75. (Expect the premium to be expensive!) When you turn 75 the insurance coverage ceases. There is no cash value and you cannot get a return on your premiums. Therefore, there is nothing to borrow against because what happens if you live to 85? If you “borrow” $100,000 from the death benefit when you are 65 when is the insurance company going to get that money back? Obviously if you die they’ll take it from the death benefit, but if you don’t die then they don’t get it back.
A person who is 55, assuming they are still in good health and wants a guaranteed death benefit along with a long-term care component, is an ideal candidate for whole life. I know that Suze Orman and Dave Ramsey hate Whole Life and tell people to never buy it because it’s a waste of money. I think that is true for many people. I agree with Dave and Suze if they are giving that advise to a young couple with a mortgage, 2 kids, student loans, etc. etc. Why? Because that young couple is probably not maximizing their current retirement plans (contributing the max to their 401k, ROTH, etc.) But for someone who is 55 and may not have a mortgage (or very little), grown children, paid off debt, whole life may be a better option. You said that you don’t want to “waste” money on premiums. By purchasing a whole life policy you are getting a guaranteed rate of return with a guaranteed death benefit, some companies even offer a long-term care component to a life insurance policy where you can “borrow” against the death benefit to pay for long-term care expenses.
Whole life has gotten a bad reputation the last few years, but I still believe whole life insurance has it’s place. You may want to look into a whole life policy if you want an insurance policy to do what you say it will do. If you only want long-term care coverage, then look into different LTC policies. You might be surprised how inexpensive some of them are