Alternatives to Buying Traditional Long-Term Care Insurance

Long-term care (LTC) is expensive, but the cost of traditional long-term care insurance (LTCI) has increased at an even faster rate in the last few decades.

Traditional LTCI became less attractive following the financial crisis. Insurers found they were paying more in claims than they had estimated and were receiving less income on their investment portfolios because of very low interest rates. The result is that many insurers left the LTCI market, leaving only a few insurers selling policies. In addition, premiums on both existing and new policies increased substantially. The level of benefits available on new policies decreased. Insurers also made it harder to qualify for LTCI, denying coverage to people with a range of pre-existing health conditions. 

Individuals began looking for alternatives to traditional LTCI. Listed below are four alternative options to traditional LTCI.

Short-Term Care Insurance

Short-term care insurance is an option for those who want assistance paying for long-term care (i.e. home care, assisted living facilities, nursing homes) when they cannot take care of themselves but can’t afford traditional LTCI.. Instead of  covering care received for a number of years, short-term care insurance, also known as recovery care, covers the cost of care for up to 12 months.

Premiums are typically cheaper for short-term care since there is no long-term commitment by the insurer. Short-term care insurance typically accepts most applicants that get rejected by long-term care insurance due to its shorter coverage period. Short-term care insurance also has little to no elimination, or waiting, period, meaning benefits begin immediately after the need for LTC arises. The insurance also provides coverage to individuals while they are in the elimination period or their traditional long-term care insurance policies. 

A disadvantage of short-term care insurance is its limited coverage. When the need for LTC exceeds one year, the individual has to pay for the additional care or have another plan in place to pay for it. Short-term care insurance also doesn’t cover LTC that is needed because of a pre-existing condition. Short-term care typically won’t cover LTC needed as the result of a condition that was diagnosed or treated within the previous two to five years, depending on the state in which the policyholder is located and the insurer. 

Annuities With LTC Benefits

An alternative to traditional LTCI that’s become popular is a deferred annuity that has long-term care benefits. These often are known as hybrid LTCI or asset-based LTCI.

Details vary considerably among annuities, but in general the individual purchases a deferred annuity with a lump sum deposit. Usually the minimum deposit is $50,000 to $100,000. The annuity has the features of a traditional deferred annuity. The amount deposited in the annuity earns interest each year that is credited to the account. There are no income taxes on the interest as long as it remains in the annuity account. The annuity owner usually can withdraw up to 10% of the balance each year if money is needed. In time, the entire amount can be withdrawn or converted to an immediate annuity that pays a fixed annual income.

A hybrid annuity also has an LTC feature. If the annuity owner is certified as needing LTC because of difficulty performing at least two of the six ADLs or being cognitively impaired, the LTC benefits kick in. The LTC feature will pay the annuity owner a fixed monthly amount. The amount is determined when the annuity is purchased. The annuity pays this amount until the maximum LTC benefit under the policy is reached. The maximum benefit also is determined when the annuity is purchased and usually provides the monthly payments for 36 months to 60 months. 

The maximum LTC benefits usually are two to three times the deposit that was made to purchase the annuity. Thus, depositing money in an annuity automatically doubles or triples the amount the individual has available to pay for LTC while ensuring heirs and beneficiaries will receive something if LTC never is needed.

If the insured takes money out of the annuity before LTC is needed, the LTC benefits are reduced. The LTC feature is paid for by accepting a lower interest rate on the annuity than would be paid on an annuity without LTC benefits. Also, LTC benefits first reduce the annuity balance before the insurer pays extra money for the benefits.

An advantage of the hybrid annuity is that the insured or the beneficiaries receive the annuity balance if LTC isn’t needed. This is unlike traditional LTCI in which the insured and beneficiaries receive no refund of the lifetime premiums paid if LTC isn’t needed. Some annuity insurers also accept applicants with health conditions that disqualify them for traditional LTCI.

Life Insurance with LTC Benefits

A permanent life insurance policy also can have an LTC rider and is known as a hybrid LTC policy or asset-based LTCI. 

As with the annuity, the individual deposits a lump sum of $50,000 or more with the insurer and receives a permanent life insurance policy with three features. Of course, there is the life insurance benefit that will be paid to the policy beneficiaries after the owner passes away. There also is a cash value account. This usually earns interest and increases each year. The insured also can either borrow from the cash value under many policies or withdraw money from it, within limits. 

LTC benefits are the third feature. Again, as with the annuity, the insured receives monthly payments from the insurer once there is a certified need for LTC. The monthly payments will continue for the limit of the policy, which usually is 36 months to 60 months. The amount of the monthly payments and length of the payment period are determined when the policy is purchased.

As with the annuity, the maximum LTC benefits usually are several times the deposit made to purchase the life insurance. Also, as LTC benefits are received, they first reduce the cash value account and the life insurance benefit. The insurer pays additional money only after those two assets are eliminated. The life insurance with LTC benefits also might be available to someone who isn’t medically qualified to purchase traditional LTCI. 

Saving Money for Long-Term Care, or Self-Insuring

Some people choose to pay for any LTC they need out of their own resources, known as private pay or self-insuring. The strategy here is obvious. Save money and invest it. If LTC is needed, the money is spent on the care.

The potential cost of LTC is the obvious downside. The average cost of LTC around the country is more than $100,000 annually. The cost is higher in higher-cost areas of the country. The cost also depends on the type of care received. Even a fairly wealthy person can spend down a nest egg if two or more years of LTC are needed.

The idea of self-insuring for LTC might be reasonable for someone who isn’t married and who has no heirs or doesn’t care if there is no money to leave for heirs. But when a person is married, one spouse must continue to pay for his or her own living expenses while paying for LTC for the other spouse. Not many families are wealthy enough to maintain one spouse’s previous standard of living while also funding LTC for the other spouse. Also, if one of your goals is to leave some money to your children or grandchildren, self-insuring for LTC might keep you from realizing that goal.

Another factor is the assets used to fund LTC must be in cash or easily converted to cash. Many people who are wealthy enough to self-insure have the bulk of their wealth in illiquid assets such as small businesses and real estate. If these have to be sold in a hurry to fund LTC, they might be sold for less than their true worth.

The Bottom Line

There are several different alternatives to traditional LTCI to pay for LTC. Each has its advantages and disadvantages, as does traditional LTCI. There’s no alternative that’s best for everyone. You have to study each of the choices and decide which is best for your situation.

Special assistance preparing “Alternatives to Long-Term Care Insurance” was provided by Bob Carlson, editor of the Retirement Watch financial advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.

Jaxon Kim is an editorial intern with Eagle Financial Publications.