People are living longer and longer, which is, of course, great news! Unfortunately, lengthier lifespans often equate to expensive hospital or nursing home stints. In fact, baby boomers 65 years or older have an approximately 70% chance of requiring some type of long-term care during their lifetime, with 25% experiencing ‘severe needs.’ As healthcare costs soar, looking into all possible long-term care solutions to mitigate this enormous risk to your retirement and well-being is increasingly vital.
What is Asset-Based Long-Term Care Insurance?
It’s a life insurance policy that uses your premiums to purchase equities, bonds, and other vehicles, combining the security of an insurance policy with the growth potential of investing. Typically, a life insurance’s death benefit goes to beneficiaries, but with asset-based Insurance, the death benefit can go to qualifying long-term medical expenses.
How does it work?
You can purchase a policy upfront with a lump sum or pay monthly premiums depending on the conditions of the policy. Then, the policy purchases assets that grow tax-free, building cash value in the policy. If you end up needing long-term care, payouts are also tax-free. When you pass away, any remaining value is passed to your beneficiaries. They can use these funds for burial expenses or their own purposes, turning an asset-based policy into a valuable estate planning tool.
Asset-Based Permanent-Life Insurance
There are two ways to take advantage of permanent life insurance with the capability to cover long-term care expenses.
Long-term care rider
The first is to purchase a permanent life insurance policy with a long-term care rider that, when activated, allows the policy’s death benefit to cover long-term care expenses.
Hybrid LTC
The other approach is what is known as a “hybrid” plan. This is a single policy providing life insurance and long-term care coverage. The two benefits exist separately but are both paid from the same pool of money.
Annuity-Based Insurance
An asset-based long-term care (ABLTC) annuity is deferred, meaning it doesn’t begin paying out immediately.
After making a one-time payment to the insurance company, the annuity accumulates in value until or if benefits are triggered. Since part of the growth covers underwriting costs, the rate is generally lower than what you would expect from a regular deferred annuity.
When triggered, the annuity offers monthly payments for long-term care, with an overall coverage limit usually ranging from 200-400% of the annuity’s original value. This limit depends on age, health, and monthly caps.
Initiating Benefits
Your policy only begins paying for expenses after some triggering event that prevents you from living an everyday and fulfilling life. These triggers differ among policies, but they usually kick in when the policyholder needs assistance with at least two daily living qualities, like eating or dressing.
You should know that some long-term care insurance policies may make you wait a month or two before benefits begin to confirm your eligibility.
Once triggered, the payouts can go directly to the long-term provider or as a check to the policyholder. No matter which method, benefits are usually subject to a monthly cap, which could result in a coverage gap.
Surrendering Your Policy
If you’re getting up in age and don’t feel you will ever need long-term care, you can surrender your policy. Depending on the company and policy, you may get a full refund on your premiums or be forced to pay a penalty. Of course, this is risky because you may get sick anyways. Plus, you’ll miss out on years of growth.
In Conclusion
Asset-based long-term care insurance remains relatively unknown to the majority of individuals, despite its potential benefits. Unfortunately, many rely on government programs like Medicaid and overlook alternative solutions to long-term-care needs. By doubling as both a shield against medical costs and a legacy planning tool with several tax advantages, the benefits of asset-based long-term care insurance should not be overlooked.
We strongly recommend reaching out to determine if asset-based long-term insurance is appropriate for your retirement plan.
