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Asset-Based Long-Term Care Coverage

By Eric Bank

The probabilities favor your eventual need for long-term care (LTC) --70 percent of Americans will require LTC services after reaching age 65. Moreover, 20 percent of those requiring LTC will utilize it for five years or more. Whereas the average nursing home stay is 2.4 years, Medicare covers only the initial 100 days. As you can see, it’s pretty important to consider what will happen to you or loved ones on Day 101. Without LTC insurance, you'll be forced to cough up the out-of-pocket costs, typically around $225 a day in 2016, but that promises to be substantially higher over the next two decades. If your pockets aren’t deep enough, you'll need to spend down almost all of your wealth to receive help from Medicaid. With regard to the value of the service you'll obtain under Medicaid -- well, that will be out of your control.

Shortcomings of Conventional Retirement Plans

Many people establish retirement plans that rely on investments and savings to cover expenses in future years. Although this ought to be an important element of your retirement planning, you must face the risk of outliving your money, especially if you don't own LTC insurance. There are many opportunities for disappointment, including:

  • Investments that fail to do well

  • Investments that you can no longer manage because of cognitive problems

  • Inflation growing faster than expected

  • Living much longer than you anticipated

  • Unforeseen expenses, such as those arising from medical and long-term care

Problems with Conventional LTC Insurance

Plain-vanilla LTC insurance pays some percentage of your LTC expenses for a set period, up to a specified lifetime amount. In return, you fork over monthly premiums. While the concept is a good, conventional LTC insurance suffers from a several weaknesses, including:

  • The policy involves extensive underwriting – insurers rely on medical exams and histories to set rates or deny insurance

  • Policy premiums can increase over time

  • Your policy can be cancelled if you forget to pay a premium

  • The initial premium briskly rises the longer you wait to apply

  • You will receive no benefits if you never need LTC

4.jpgThe Asset-Based Alternative

Hybrid, or asset-based, LTC solutions combine an annuity or whole life insurance policy with LTC coverage. These inventive solutions pay your LTC expenses only as needed -- otherwise, they operate as regular annuities or life insurance policies. Insurance-based LTC contracts are frequently set up as single- or limited-premium policies that pay a specified monthly amount for any required LTC costs and pay out a death benefit if LTC doesn’t exhaust the cash value of the policy. In addition, the policy may make available LTC benefits that last your entire lifetime, in exchange for higher premiums. A hybrid annuity often commences with the tax-free exchange of a pre-existing annuity to pay for the new contract. You can then distribute the annuity’s cash value as required to cover LTC costs, and these withdrawals might be tax-free if the policy is structured correctly.

Asset-based LTC polices provide more flexibility than do conventional policies because you can employ them for additional purposes, such as death benefits and retirement income. Frequently, these policies necessitate less-intensive underwriting, making them easier and less costly to obtain, especially when your health status is less than perfect. Asset-based LTC policy premiums are often fixed, avoiding rising costs as you age. Finally, fully funded policies don't oblige you to remember to pay your premiums, so you needn’t worry that the contract will lapse.

Frequently Asked Questions