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Life Insurance for Long Term Care Planning

Life insurance companies have become more competitive in recent years for policies issued on people over age 70. Good health is still a major consideration for low premiums, but policies have been redesigned to provide more death benefit and less cash value. Some term policies and certain universal life permanent policies are designed to provide a guaranteed death benefit up to age 95 with a guaranteed premium and no cash value at all. This design generally results in more death benefit for each premium dollar. Also, policies designed for couples — second-to-die policies — can provide a significant amount of insurance for a one-time single premium even if one of the partners is in very poor health.

An important concept to consider is that single premium life policies with no cash value and purchased for estate planning purposes, many years in advance of applying for Medicaid, can be a valuable planning tool if the need for Medicaid arises. Medicaid does not apply the death benefit of a life insurance policy to the asset spend down rule. But the cash value of any policy that has more than $1,500 in cash will count towards the asset test and could disqualify a Medicaid applicant. As an example, a person could have $1 million of life insurance with cash value less than $1,500 and it would not prevent that person from receiving Medicaid. However, cash value of more than $1,500 in this example will apply toward the asset test. It is important to know, for long term care planning purposes, that people who apply for Medicaid and then transfer assets to a life insurance policy, while they are going through spend down, could be in violation of their state’s Medicaid transfer rules and such an act may disqualify the applicant.

Life insurance can be used as an alternative for funding the cost of long term care. If someone planning for the eventuality of long term care is concerned about losing assets that would normally be passed on to the children or be needed by a surviving spouse, that person can invest a portion of those assets in life insurance and leverage a death benefit payout — sometimes for up to $3.00 in death benefit for every $1.00 in single premium. The death benefit is also income tax-free. A person creating such an estate can then use remaining assets for long term care needs in the future but still be assured that the children or a surviving spouse will receive an inheritance at death through the life insurance. And, as discussed above, if the money runs out and Medicaid has to start picking up the costs, a single premium life insurance policy with less than $1,500 cash value will not disqualify the applicant owning the policy

Another use for life insurance for the elderly is in paying the cost of final expenses such as funeral and burial. A number of companies will issue policies without any health questions for people who may not have very long to live. Most of these policies will provide little or no death benefit in the first two years after issue and so there is some risk, but most companies will also return the premiums paid if death occurs in the first two years.

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