What Happens to Unused Long-Term Care Insurance?

Long-term care (LTC) insurance provides financial support when you can no longer manage daily activities on your own. Services include nursing home care, assisted living and in-home assistance. But what happens to unused long-term care insurance if you never need to file a claim? This is a common concern for policyholders and their families, especially given the significant investment these policies require over many years. Understanding the fate of unused benefits is crucial when evaluating whether to buy long-term care insurance. In most traditional policies, if you never use the coverage, the premiums you’ve paid typically do not get refunded. In this case, your beneficiaries do not receive any payout.

A financial advisor can help untangle the costs and benefits of long-term care insurance.

Long-Term Care Insurance Basics

Long-term care insurance helps pay for healthcare costs not covered by Medicare or conventional health policies.

It helps disabled people and those with chronic health conditions pay for assistance with activities such as dressing, bathing and eating. It can also cover nursing care and expenses for in-home care, as well as nursing homes and assisted living facilities.

However, it does not pay for everything. Medical care covered by health insurance is not included, such as doctor visits, lab tests and hospital stays.

Long-term care can be quite expensive. Genworth reports the median monthly costs range from $9,842 for a semi-private room to $11,294 for a private room in a nursing home. ¹ These costs aren’t typically covered by Medicare. Therefore, a retiree can quickly drain their nest egg without long-term care coverage.

Insurance to pay long-term care costs can be comparatively inexpensive. The average annual premium for a 55-year-old man ranges from $950 to $3,710. Pricing depends on the policyholder’s health and the size of the benefit. ²

However, half of long-term care insurance policyholders die before ever using their benefits, according to the AALTCI. ³ The majority who purchase coverage that doesn’t begin paying until 90 days after the covered individual begins needing long-term care, only 35% ever use their benefits.

Shared Spousal Benefits

You can also use your unused long-term care insurance policy benefits to get an insurance policy with shared spousal benefits. This is a type of traditional long-term care insurance that covers a couple. It allows the surviving spouse to use any unused benefits after the other spouse dies.

If the deceased spouse uses all benefits before dying, the surviving spouse gets no benefits from that policy. However, if either spouse uses all their benefits, they can then begin using unused benefits from the other spouse’s coverage.

The advantage of spousal benefit policies is that you are much more likely to use policy benefits when two people are covered.

Return of Premium Policies

Policies providing for a return of premium also allow you to benefit from paying for unused long-term care insurance coverage.

These policies blend long-term care coverage with a life insurance death benefit. They pay back a portion of the premiums on an unused policy when the policyholder dies.

These hybrid policies vary significantly in how many premiums they will return:

• Some return all the premiums, plus an additional death benefit.
• Others will return only the premium amount, minus any claims made under the policy.
• Others offer a graded return that decreases as the policyholder gets older.

Other Long-Term Care Coverage Options

There are other types of investments and policies that you can use to get LTC benefits.

• Annuities with long-term care benefits. Some fixed and indexed annuities may include contracts that provide an extra payout if you need long-term care. The annuity starts paying a higher monthly benefit that is a multiple of the premiums you have already paid.
• Hybrid long-term care insurance. You can get a life insurance policy that serves as a hybrid for both life and long-term care insurance. Medical underwriting is typically less rigorous than it is for traditional long-term care insurance. You can even get access to lifetime or unlimited long-term care benefits in this type of policy.

Tips for Estate Planning With Unused Long-Term Care Insurance

Planning for the future often involves making decisions about long-term care and how to protect your assets.

If you have an unused long-term care insurance policy, these strategies can help you incorporate it into your estate planning.

• Refund or return-of-premium features. Some long-term care insurance policies offer a return-of-premium rider. This refunds a portion of your premiums to your estate or beneficiaries if you never use the benefits. Check your policy details to see if this feature is available and how it works.
• Policy conversion or exchange options. With certain insurers, you can convert unused LTC insurance into a different type of policy, like life insurance with a death benefit. This can provide a financial legacy for your heirs if you don’t need long-term care.
• Gift or transfer policy benefits. In some cases, you may be able to transfer ownership of your policy to a family member or trust. This can help with Medicaid planning and also help ensure that policy benefits go to someone who may need them.
• Estate plan coordination. Work with an estate planning attorney to integrate your long-term care insurance into your overall estate plan. This ensures your heirs honor your wishes so your assets are distributed efficiently.

Unused long-term care insurance doesn’t have to go to waste. Understanding your options helps you maximize your policy’s value and ensure your loved ones benefit from long-term care planning.

Consider consulting a financial advisor or estate planning professional to tailor these strategies to your unique situation.

What Happens to Your Premiums If You Cancel Your Policy

Canceling a long-term care insurance policy is more common than most people expect.

Traditional long-term care premiums are not fixed, and insurers raise rates significantly over time. When that happens, policyholders must decide whether to keep paying, reduce their benefits or cancel the life insurance policy altogether. What you walk away with depends almost entirely on whether your policy includes nonforfeiture benefits.

Policies Without Nonforfeiture Benefits

If your policy does not include a nonforfeiture benefit, canceling means you lose everything you have paid in premiums. There is no partial refund, no reduced coverage and no death benefit.

This is the default for most traditional long-term care policies. This is why understanding what your policy includes before you stop paying is critical.

Policies With Nonforfeiture Benefits

If your policy includes a nonforfeiture benefit, you may be entitled to a paid-up reduced benefit after canceling. This means that instead of losing all coverage, you retain a smaller version of your original policy. No further premiums are required.

The reduced benefit is typically calculated based on the total premiums you pay over the life of the policy. The longer you hold the policy before canceling, the more coverage you are likely to retain.

Contingent Nonforfeiture

Some states require insurers to offer contingent nonforfeiture protections when they raise premiums beyond a certain threshold.

Say your insurer increases your premium by a significant percentage and you cancel rather than pay the higher rate. Contingent nonforfeiture allows you to keep a reduced paid-up benefit rather than forfeiting everything. The specific premium increase that triggers this protection varies by state and by the age at which you first purchase the policy.

The Breakeven Question

Before canceling, calculate the total premiums paid against the reduced benefit you would retain under a nonforfeiture option.

The math looks very different depending on where you are in the life of the policy. Contact your insurer directly to ask what nonforfeiture options are available under your specific policy. Also inquire about which paid-up benefit amount you qualify for based on your premium history.

A financial advisor can help you weigh whether a higher premium makes more sense than walking away entirely.

Bottom Line

Understanding what happens to unused long-term care insurance is essential for anyone considering this important financial product. If you never need long-term care, traditional policies typically do not offer a refund of premiums. This means your payments are not returned to you or your heirs. However, some insurers now offer hybrid policies that combine life insurance or annuities with long-term care benefits. With these, your beneficiaries may receive a death benefit or a return of premium if you don’t use the long-term care portion, providing added peace of mind.

Tips for Long-Term Care Insurance

• A financial advisor can help you weigh the costs and benefits of the different types of long-term care insurance, including ways to benefit from a policy you never use. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, begin now.
• Be sure to use the free SmartAsset retirement calculator to get a quick estimate of how you’re preparing for retirement.

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