Long-term care insurance can be an excellent way to prepare for potential care needs later in life. However, it does come with a significant financial commitment. This leads many considering long-term care insurance to wonder – if I ultimately don’t end up needing care, will I have lost all the money I put into premiums? Or does long-term care insurance have some kind of surrender value I can get back?
The short answer is it depends on the type of policy. Traditional long-term care insurance does not have a surrender value. However, some newer “hybrid” policies that combine life insurance and long-term care do have a surrender value.
In this comprehensive guide, we will cover:
- What is the surrender value of an insurance policy?
- Do traditional long-term care insurance policies have a surrender value?
- Do hybrid policies have a surrender value?
- What are the pros and cons of policies with a surrender value?
- Who should consider a policy with a surrender value?
- What to know before cancelling a long-term care insurance policy
What is the Surrender Value of an Insurance Policy?
The surrender value of an insurance policy refers to the amount of money you would get back if you chose to cancel (surrender) the policy before it pays out benefits.
For permanent life insurance policies, this is usually the accumulated cash value in the policy. Permanent life insurance accumulates cash value as part of the premiums paid. This cash value belongs to the policyholder. If the policyholder surrenders the life insurance policy, the insurance company will pay back the accumulated cash surrender value.
For other types of insurance like long-term care insurance, there may or may not be a surrender value depending on the policy. We’ll break down how it works for traditional and hybrid long-term care insurance next.
Do Traditional Long-Term Care Insurance Policies Have a Surrender Value?
Traditional long-term care insurance policies do not have a surrender value. With traditional long-term care insurance, your premiums go entirely towards paying for the insurance coverage itself. There is no cash value accumulation component.
If you ultimately end up not needing long-term care, your traditional LTC insurance policy would simply lapse without paying any benefits. You would not get any money back.
This understandably deters some people from purchasing traditional long-term care insurance. It feels like wasted money if you pay premiums for years and never end up using the coverage.
However, it’s important to think of traditional LTC insurance as pure insurance protection. You pay to protect yourself against the potential risk of needing extended long-term care. This gives you valuable peace of mind. And if you do end up needing care, the policy can pay out exponentially more in benefits than you put into premiums.
The lack of cash accumulation can also help keep traditional LTC insurance premiums lower than other options. Overall, while traditional policies don’t have a surrender value, they provide strong and affordable long-term care coverage.
Do Hybrid Policies Have a Surrender Value?
Hybrid life/LTC insurance policies combine permanent life insurance with long-term care coverage in one policy. These policies do have a surrender value equal to the cash value built up in the life insurance portion.
With hybrid policies, part of each premium goes towards the life insurance cash accumulation, while the other part goes towards the LTC insurance coverage.
If you surrender a hybrid policy, the insurance company will pay back the current cash value. This can provide some return on your premium investment if you end up not needing the LTC coverage.
However, it is very important to understand that accessing the cash value can greatly reduce or eliminate the long-term care benefits. With most hybrid policies, if you take withdrawals or policy loans from the cash value, it will directly reduce the pool of money available for long-term care benefits.
And if you fully surrender the policy, you would lose the LTC coverage altogether. So while hybrids can offer a surrender value, it comes at the direct cost of reducing potential future LTC benefits.
Pros and Cons of Policies with a Surrender Value
Below we’ll summarize some of the key pros and cons of long-term care insurance policies that have a surrender value versus those that do not:
Pros of Policies with a Surrender Value
Provides an exit strategy to get some premiums back if you end up not needing LTC coverage. This can give some peace of mind that the money isn’t totally lost.
Having a surrender value allows policyholders to access cash from the policy via withdrawals or loans if needed, providing access to funds.
Life insurance component of hybrids means beneficiaries get a death benefit payout even if the policyholder doesn’t use LTC benefits.
Cons of Policies with a Surrender Value
Accessing surrender value via withdrawals or loans reduces available LTC benefits, which defeats the purpose of buying coverage.
Premiums are higher than for traditional policies since you are paying for life insurance as well. This reduces potential savings from paying lower traditional LTC premiums.
Administrative fees and costs associated with the life insurance component can reduce the net cash that accumulates in the policy.
Traditional LTC premiums can never increase, while hybrid premiums are guaranteed. But traditional premiums historically rise slower than hybrid over time.
Traditional LTC provides stronger LTC benefits for the premium dollars spent compared to hybrids.
Overall there are reasonable pros and cons to both types of policies. It’s about evaluating your needs and priorities to choose the right solution.
Who Should Consider a Long-Term Care Policy with a Surrender Value?
Below are some of the main scenarios where a long-term care insurance policy with a surrender value may make sense:
You want to ensure you get some monetary value back if you end up not needing LTC coverage. The ability to get premiums back provides peace of mind.
You have a dual need for life insurance AND LTC coverage. Hybrid policies can meet both needs in a single policy.
You want to earmark funds specifically for LTC and ensure they can’t be spent for other purposes. The cash value accumulation in hybrid policies “locks up” funds for LTC purposes only.
You may have a need to access cash from the policy via withdrawals or loans at some point. The surrender value provides potential access to those funds.
You meet underwriting criteria for a hybrid policy but not a traditional LTC policy due to health conditions. Hybrid underwriting is sometimes more lenient.
You expect to be in a higher tax bracket later in retirement when benefits would be paid out. Hybrid payouts are generally tax-free versus taxable for traditional LTCI payouts.
You want premiums that will never increase. Hybrid premiums are guaranteed while traditional LTCI premiums can potentially increase over time.
On the other hand, those who are less concerned about getting money back and simply want strong LTC coverage may be better served by lower-cost traditional policies.
What to Know Before Cancelling a Long-Term Care Insurance Policy
For those considering cancelling a long-term care insurance policy, there are a few important things to keep in mind:
Make sure you understand what surrender value you will get back and the process for receiving the funds. This varies by insurer.
Be aware that cancelling can negatively impact your ability to obtain coverage later. This is especially true for hybrid policies with their guaranteed premiums.
Check if your policy has a contingency nonforfeiture benefit. If so, cancelling may convert your coverage to limited paid-up LTC benefits.
Consult with a tax advisor. Surrendering certain policies may have tax implications.
Consider impacted insurability. Getting re-approved for as much coverage later if your health declines can be difficult.
For hybrids, be conscious of how cash value withdrawals impact remaining LTC benefits. Don’t sabotage benefits you may need later.
If cancelling due to premium increases, explore opting for reduced inflation or benefit period before fully cancelling.
Evaluate if there are ways to reduce premium outlays such as receiving spousal discounts, taking discounts for paying annually, or modifying coverage terms.
Consider LTC coverage needs not just now, but 5, 10, 15+ years from now as health and care costs escalate.
Before surrendering traditional policies, make sure you have sufficiently evaluated alternatives to fund potential LTC needs.
The decision to surrender a policy is complex, so be sure to speak with your insurance advisor and consider both short and long-term implications before making any moves. Do your due diligence.
The option to get money back from a long-term care insurance policy if you end up not needing care can be appealing. However, it’s important to look beneath the surface.
Traditional policies provide strong and cost-effective pure LTC coverage but lack a surrender value.
Hybrid policies offer a cash value surrender option, but it comes at the cost of higher premiums and reduced LTC benefits if accessed.
There are reasonable pros and cons to each type of policy. Take time to fully understand how surrender values work with hybrids, including the impact cash value
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