Alternatives to long-term care insurance

Long-term care insurance is not for everyone, and there are other options that work for some people.

  • By Rodney Brooks,
  • U.S. News & World Report
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A long-term care insurance policy can help you financially prepare for a time when you might not be able to take care of your own basic needs, including eating, bathing and dressing. Among people turning 65 today, approximately 70% are expected to need some type of long-term care, according to the U.S. Department of Health and Human Services. But long-term care insurance isn't the only way to pay for in-home care, adult day care, assisted living or a nursing home.

Long-term care insurance is not an option for everyone. Policies can be expensive, especially if you wait until your 50s or 60s to look into purchasing long-term care insurance. "Most people, when they are young enough and healthy enough to be able to afford long-term care insurance, it's not in their plans," says Joe Davis, a financial planner and president of Living Capital Group in Washington, D.C. "When you are young with a minimal number of medical incidents, it is easier and cheaper. By the time you feel like you need it, you generally have a health history that will prevent you from getting it." And even if you have long-term care insurance, some policyholders have been hit with big price hikes that make it unaffordable to maintain the plan.

Slightly more than 8 million Americans have long-term care insurance policies, according to the American Association for Long-Term Care Insurance. That means that despite the long-term care risks, most Americans are finding alternatives. "Luckily, the long-term care marketplace has evolved, and there are new types of long-term care options available that are more attractive than the policies of the past," says Jessica Landis, head of investment solutions at Janney Montgomery Scott in Philadelphia.

Consider these alternatives to long-term care insurance:

  • A life insurance policy with a long-term care rider.
  • An asset-based policy.
  • An annuity.
  • Save money for long-term care.
  • Family and friends care.

Here are some ways to pay for help with daily living tasks when you don't have long-term care insurance.

A life insurance policy with a long-term care rider

You can purchase a life insurance policy with a rider that allows you to use the death benefit in the event you qualify for long-term care. "If you don't use the long-term care benefit, your heirs or favorite charity can receive a life insurance death benefit as a result of the premiums you paid instead of the 'use it or lose it' scenario that traditional long-term care insurance offers," Landis says.

An asset-based policy

Asset-based policies are a hybrid of life insurance and long-term care insurance. "If you end up where you need long-term care, you can use the benefit to pay for a nursing home tax-free. If you don't need a nursing home, money in asset-based care will pay a tax-free benefit to your beneficiary," says Kristian Finfrock, a financial advisor and founder of Retirement Income Strategies in Madison, Wisconsin.

You need to have some cash on hand to fund an asset-based policy, but such policies typically allow you to avoid some of the problems of traditional long-term care insurance, such as significantly higher premiums. "This type of policy can be funded with a lump sum or over a specified period of time, like five or 10 years, without the risk of rising premiums," Landis says. "This type of solution is best for clients who are most concerned about maximizing their long-term care benefits, don't want rising premiums and are less concerned with a death benefit."

If you decide you no longer want the policy, many asset-based policies will return all or a portion of your premiums to you as cash back. "These policies also offer the ability to have your long-term care benefits increase or inflate over time, so your benefits increase as costs rise," Landis says. "This differs from the life insurance option where your benefits are fixed."

An annuity

If you invest a large lump sum, an immediate annuity will provide a steady stream of payments that can be used to pay for long-term care. The amount of your payments depends on many factors, including your age, health and how much you paid in. Also, keep in mind, the amount you receive may not be enough to cover all of your expenses. "These annuities can be issued up to age 80, don't require a medical exam and have fewer questions than long-term care insurance policies, making them a nice option for clients who may not be able to obtain insurance coverage," Landis says.

Save money for long-term care

If you have a large nest egg or a significant pension, you might be able to pay for long-term care out of pocket. Look at local long-term care costs to determine if you will have the financial ability to hire someone to come into your home, if necessary. "Do the math and figure out if you have resources to support that for you or for other family members," Davis says. The risk is that you could run out of money if you have very expensive health care needs over an extended period of time. If you spend down all of your savings, you might qualify for Medicaid, which pays for long-term care for low income retirees.

Family and friends care

If you burn though all of your savings, you might need to turn to family and friends for help. "The reality is when people need long-term care, a lot of times it is provided by family members," Davis says. "It could be quite burdensome."

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