Scrutinize combined life, long-term care products

It's often a deal when you can buy two things for the price of one.

That's why people are intrigued with the idea of buying life insurance that also will pay out for long-term care if it's needed.

But before you buy, check out the alternative of buying separate life and long-term care policies, experts warn.

Long-term care insurance is not for everyone.

People with few assets and modest incomes will likely qualify for Medicaid to cover nursing home bills, and people with substantial assets and income probably can afford to pay for long-term care out of their pocket.

For everyone else, a long-term care policy is probably the best protection against the high cost of long-term care.

However, long-term care insurance can be expensive.

A policy providing four years of benefits at $110 a day for a 65-year-old might cost a little more than $800 in annual premiums to as much as $2,000 for a policy with inflation protection.

Still, $2,000 a year is low compared to nursing home costs that might run $4,000 a month.

The idea of shelling out money for long-term care insurance on top of other insurance costs is one reason consumers are intrigued by the idea of buying life insurance that also can pay out for long-term care.

Here's how it works. Let's presume you own a life insurance policy that features a long-term care rider, and you are in need of long-term care, such as nursing home or home health care.

After a waiting period 60 to 90 days is common the policy pays out each month a percentage of its death benefit, or the death benefit less any outstanding loan.

Two percent is a typical monthly payout. Thus, a $150,000 death benefit would pay out $3,000 a month, or roughly $100 a day.

Nursing home costs average around $40,000 to $50,000 a year, so the policy would pay for much, though not all, of the average bill.

The amount of long-term care benefits paid out is deducted from the life policy's death benefits and any accumulated cash values.

In the example above, the $150,000 life policy (not counting cash values) would be exhausted in slightly more than four years.

The upside of such an approach is fairly obvious.

Six in 10 people will never need long-term care, and the majority of the remaining four in 10 won't need it for more than a year.

Thus, the majority of life insurance owners won't have to tap into their policies for care, and the death benefits will pass to the intended beneficiaries two policies for the price of one.

Also, if you're already in your 70s, you may find long-term care insurance prohibitively expensive.

But many insurance and financial planning experts caution people to tread carefully here.

First, it's not wise to gamble that you won't need long-term care for more than a short time. An extended or lifetime stay in a nursing home, in this case, would be financially disastrous.

Homeowners are less likely to have their homes burn to the ground than they are to need long-term care, but few risk going without homeowner's coverage.

Second, a long-term care rider probably won't provide as many features as a state-of-the-art long-term care policy.

For example, the life policy may not cover assisted living, which is fast becoming a popular choice for custodial care.

It also would not provide an inflation adjustment, an important feature considering that nursing home costs can easily double every 10 years.

Third, it's not uncommon for people to drop their life insurance in their later years if there's no compelling need for it, such as for estate taxes precisely when they are most likely to need long-term care.

Fourth, if you use your life insurance to pay for long-term care, you're drawing away the death benefits you presumably wanted to pass on to your heirs upon your death, or perhaps use to pay for estate taxes.

Fifth, compare costs carefully. Depending on your age and health, the cost for the combination life policy may actually be higher than the total premiums paid for separate life insurance and long-term care policies.

(The preceding article was produced by the Financial Planning Association and provided by William O. Woody, CLU, ChFC, CFP, of Stovall Woody Associates.)