3 BEST Alternatives for Long Term Care Insurance
There are 3 BEST Alternatives for Long Term Care Insurance
- Life insurance hybrid plans
It might be hard to imagine now, but chances are you’ll need some help taking care of yourself later in life. The big question is: How will you pay for it?
Buying long-term care insurance is one way to prepare. Long-term care refers to a host of services that aren’t covered by regular health insurance. This includes assistance with routine daily activities, like bathing, dressing or getting in and out of bed.
A long-term care insurance policy helps cover the costs of that care when you have a chronic medical condition, a disability or a disorder such as Alzheimer’s disease. Most policies will reimburse you for care given in a variety of places, such as:
- Your home.
- A nursing home.
- An assisted living facility.
- An adult day care center.
Considering long-term care costs is an important part of any long-range financial plan, especially in your 50s and beyond. Waiting until you need care to buy coverage is not an option. You won’t qualify for long-term care insurance if you already have a debilitating condition. Most people with long-term care insurance buy it in their mid-50s to mid-60s.
Whether long-term care insurance is the right choice depends on your situation and preferences.
Whether to purchase long-term care insurance or not is a personal decision.
Many people opt not to purchase it because it costs too much or they simply don’t know enough about it.
Who Should Buy Long Term Care Insurance?
Whether you need long term care insurance or not depends on your financial health.
Very Wealthy? If you are very very wealthy, you might be better off using your own money to pay for long term care expenses.
Low Income? If you have very little income, you probably can not afford the insurance.
Somewhere in Between? If you are somewhere in between, then knowing what to do is tricky.
The reality is that most of us are going to need some kind of long term care at some point in the future.
Another fact is that these services are very expensive.
So, is long term care insurance really worth it? What other options do you have to not go bankrupt paying for the care?
There are 3 BEST Alternatives for Long Term Care Insurance
What is Life Insurance Hybrid Plans
The traditional long-term care insurance industry continues to struggle with high premium rate increases and fewer insurance companies willing to offer stand-alone or traditional policies. Added to these concerns is the push back from clients who are hesitant to spend thousands of dollars in premiums with nothing to show for their money should they never use their LTC insurance benefits.
As a result, hybrid Life/LTC insurance policies — which combine permanent life insurance with an accelerated death benefit rider that pays long-term care benefits — have been rapidly gaining popularity in addressing some of the perceived shortcomings of traditional policies. Over the last several years, the LTC insurance industry has seen substantial growth with these “hybrid”-type policies, which include expanded carriers, products and riders.
The primary advantages of these “hybrid” policies are that they offer tax-free reimbursements for qualified long-term care expenses; tax-free death benefits to your heirs if your LTC benefits are not fully used or needed; and a potential return of your premium if you change your mind down the road.
Let’s look at three common forms of hybrid life insurance policies with accelerated death benefit riders. Keep in mind that all riders, which are add-on features to enhance the underlying life insurance policy, must be decided at the time you purchase your policy and are factored into your total premium costs accordingly.
- Life insurance with LTC death benefit acceleration rider:The benefit of this type of policy is that policy-owners may accelerate payments (i.e., take an advance) from their death benefit while they are still alive for qualified LTC needs. Under this acceleration of death benefit, the LTC benefit received will reduce the death benefit dollar for dollar. Once the death benefit is fully used up for LTC needs, the policy terminates. Any unused death benefit will be paid out to beneficiaries at the time of the insured’s death.
- Life insurance with a chronic illness rider:This type of policy is very similar to the previous policy except some carriers will only accelerate death benefit payments for a qualifying, permanent chronic illness. A chronic illness refers to a condition with no medical cure such as heart disease, Parkinson’s, some cancers, etc. A broken hip may generate payments under a LTC rider, but it would not qualify under a chronic illness rider because it is not a permanent condition. In addition, some consumer protections (such as the ability to reinstate a lapsed policy) may not be available on a chronic illness rider. The devil is in the details, so it’s important to understand the differences between a LTC rider and a chronic illness rider.
- Linked benefit life insurance with extension-of-benefits (EOB) rider:This policy with EOB rider offers two distinct benefit pools such that LTC benefits may be paid out even after the death benefit has been completely depleted. The first benefit pool is an acceleration of the death benefit, which is available for monthly LTC benefits or as a death benefit. Once this first benefit pool is completely used up, and assuming the insured still has a LTC claim, monthly benefits will be paid from the second benefit pool, which may be up to three times more than the policy’s death benefit. Unlike the first pool, this second pool is available only for monthly LTC benefits. Both pools are designed to last a specific number of years with a maximum amount of LTC benefit dollars in each pool. Combined LTC benefits from both pools may be up to four times the policy’s original death benefit depending on specific policy terms. Any unused death benefit (from the first pool) will be paid out to beneficiaries at the time of the insured’s death.
Some investors with extra cash like the idea of leveraging a single premium payment into a linked benefit plan with EOB rider to lock in future long-term care benefits that may be as much as four times their single premium deposit. If you never need the LTC benefits, you are guaranteed a death benefit higher than your premium; and if you cancel your plan, you typically receive all or most of your initial deposit back. These linked benefit plans are also called “asset-based” LTC insurance plans and may be funded from different sources such as savings, retirement plans and 1035 exchanges from existing life insurance or annuities.
Advantages and disadvantages of hybrid vs. traditional LTC insurance
- Guaranteed return of premium in some form via a death benefit or long-term care benefits (or both), thus eliminating the use-it-or-lose-it-risk. It’s comforting to know you can often get most of your premium dollars back if you decide to cancel the policy after the surrender charge period ends.
- Premium rates are locked in, eliminating the worry of future rate hikes.
- Medical underwriting requirements may be less stringent with some carriers.
- Cash indemnity benefit plans are no longer being offered for new traditional LTC policies. If it’s important to pay nonlicensed informal caregivers from LTC benefits, certain hybrid plans still offer cash indemnity benefits.
- Preferential tax treatment for repurposing existing life insurance and annuity policies via 1035 exchanges.
- LTC riders can be expensive and may require deeper pockets up front — premium payments are typically funded via a single pay or limited annual payments. However, new products are evolving with more flexible premium payment options, including lifetime annual payments.
- LTC payouts reduce your life insurance policy’s cash value and/or death benefit, which may result in leaving little or no death benefit to your heirs if you need long-term care for an extended period of time.
- A hybrid policy should not be your sole life insurance policy if you really have a death benefit need.
As you can see, these policies are complex. You should carefully review plan features, riders and costs before making your decision.
It’s hard to make an informed decision without seeing the numbers and comparing plan features, and we recommend getting several quotes. It’s important to review the policies carefully with your financial adviser and insurance expert to ensure the plan features and costs are in line with your expectations and meet your specific needs for both long-term care and life insurance.
Indeed, combo annuities can deliver some return if LTC is never required.
The annuities used for this purpose have mostly been FIAs with lifetime income riders.The LTC rider increases the monthly or annual payout to 150% or 200% of the regular payout once the policyowner cannot perform two of six activities of daily living.
The increased payout may be limited by time or account value.
For example, if the lifetime payout is $20,000, the insurance company may increase the payout when LTC is needed to $40,000 per year for up to five years or until the policy value reaches zero. Then the payout would return to $20,000 for the remainder of the client’s life.
It is true that annuities have higher fees than other investments. This is because annuities are insurance products and, just like auto insurance or homeowners insurance, you are transferring risk to the insurance company.
An annuity is transferring investment risk, interest rate risk and longevity risk to the insurer.
Naturally the only reason an insurance company is willing to absorb those risks is because it is being paid a fee. The fee for this annuity is XYZ amount. It makes sense to pay those fees for this portion of your money because the annuity helps with your two biggest objectives: lifetime income and some level of protection in the event of long-term care. The remainder of your investments will have lower fees, more liquidity, more upside potential, etc., but will not have the guarantees of the annuity.
The ideal scenario for using these hybrid annuities for LTC coverage is someone who does not want to pay annual premiums for a traditional policy and wants their money in a safe, yet low-yielding investment. If the long-term care benefits are not triggered, the client can earn a low yield from the annuity.
Many retirees have significant cash value built up in life insurance policies in which the death benefit is no longer needed. Exchanging the cash value into a hybrid product to address the potential future long-term care need is a great way to get long-term care insurance with no additional out-of-pocket expense.
SHORT-TERM CARE BENEFITS
With short-term care coverage, you select the benefit amount. The benefit amount is usually in $10 increments from $50 to $300 per day. Then, you select the number of days (up to 360) to receive the benefit.
Unlike long-term care policies which typically have a 90-day waiting period for benefits, short-term care benefits go into effect the first day you need care. Triggers for benefit eligibility are generally the same as long-term care coverage. The policy pays for care when the policyholder has a cognitive impairment or can’t perform at least two of six activities of daily living without help. This includes eating, bathing, dressing, toileting, continence, or transferring from a bed to a chair.
“Short-Term Care Insurance is an alternative, affordable option compared to long-term care coverage.”
It’s important to note, short-term care policies may not cover all levels of care. Some short-term policies only cover facility care while others may only cover care in the home. Work with an LTC Specialist to be sure you understand all the features which can vary by carrier.
IS SHORT-TERM CARE INSURANCE RIGHT FOR ME?
While short-term care insurance is recommended as a “Plan B”, it’s a great solution for individuals who can’t qualify for long-term care coverage or are priced out with higher premiums. Our motto: some coverage is always better than none!
Interested in an Alternative for your Long Term Care?
In the end, long-term care planning is crucial, but there are a number of existing insurance products now available that can help cover these costs.
A traditional long-term care insurance policy can still play an important role in funding long-term care expenses.
It is not the only option, however, as life insurance policies both under accelerated death-benefit riders and LTC linked-benefit riders can provide alternative long-term care funding options.
The most important considerations for consumers are to investigate all of the options available before making a purchase, and to make sure one understands the benefits, costs, and drawbacks associated with each specific funding strategy.
Contact us to review your options.
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