Alternatives to Long-Term Care Insurance
Purchasing a long-term care insurance policy can be greatly beneficial. These policies can help protect your savings and cover the cost of a wide range of long-term care services, including in-home care, adult day care, assisted living, nursing homes, and more – many of which would not be covered under something like Medicare. However, long-term care insurance isn’t the only way to pay for these services, and it does have its drawbacks. The main factor keeping more people from purchasing an LTC insurance policy is cost. While the average yearly premium is around $2,700, some policies are on track to exceed $8,000. The possibility of future rate increases is also a major deterrent. Last but certainly not least, while 70% of today’s 65-year-olds will require some form of long-term care in the future, there are also plenty who never will. Many people are understandably hesitant to spend large sums of money for coverage they may never actually use. Indeed, high costs and the threat of rising premiums have caused the popularity of long-term care insurance to decline in recent years. Here, we will explore some alternative strategies that you can use to pay for long-term care services and the pros and cons of each.
Even if you are planning on purchasing a long-term care insurance policy, it is still worth reviewing the other options available to you, especially since not all of them have to be mutually exclusive with long-term care insurance. You may find that it is beneficial to combine your LTC policy with one of the options listed here – for example, you could purchase a short-term care insurance policy to help get you through the elimination period of your long-term care insurance policy.
Perhaps the most talked-about alternative to a normal long-term care insurance policy is what is known as a hybrid life insurance and long-term care insurance policy. You may also see these policies referred to as long-term care/life insurance policies or asset-based life insurance and long-term care policies. At their most simple, these are policies that combine life insurance with long-term care coverage and allow you to draw from your death benefit in order to pay for long-term care. A hybrid policy essentially gives you have a large pool of money to work with, which you can then use for any long-term care you may need. Whatever you don’t use becomes a death benefit for your heirs. This allows you to have the comfort of knowing that you will have money available if you need care which won’t go to waste if you don’t need it. While they are still a relatively new invention, these policies are becoming increasingly popular. LIMRA, an insurance marketing research group, reports that sales of hybrid policies have increased 50% since 2012.
Ensuring your money doesn’t go to waste is not the only advantage of a hybrid policy. Unlike normal long-term care insurance, the cost of premiums for hybrid policies is considered “noncancelable”, meaning that it is locked in upfront. This means that there is no risk for a rate increase over time. Some hybrid policies will even let you get your money back if, years later, you decide that you no longer want them. Those who are older or in poorer health will also generally have an easier time acquiring this type of policy than a non-hybrid LTC insurance policy.
The main downside to hybrid policies, as with normal long-term care insurance policies, is their cost. While normal LTC policies can be expensive, hybrids are even more so, costing two to three times more despite providing many of the same benefits. You also have a much shorter time period to pay into a hybrid policy, as most will have you pay either one large premium upfront or several reasonably large premiums over a period of a few years. LIMRA reports that in 2016, the average single premium for this type of insurance was $89,000. Put in basic terms, hybrids guarantee that you can get unused money back, but they will charge you extra for it. This means that this option is really only open to those who have a large sum of money on hand right now. It should also be noted that unlike normal long-term care insurance, the premiums paid for a hybrid policy are not tax-deductible.
You also do take on certain risks when buying a hybrid policy, the biggest of which relates to interest rates. By opting for a policy like this, you could end up forgoing thousands of dollars in potential earnings on your investment if interest rates rise, since this type of policy does not guarantee that you will earn market rates. This is something that is particularly concerning now since interest rates are currently at a 40-year low. The possibility of losing all of those potential earnings can make a hybrid policy even more expensive than it may first appear.
However, hybrid policies are still worth looking into, especially if you are uncertain whether you will need care in the future and want to ensure that your money will be put to good use. And they are definitely a good option if the alternative is drawing money for care directly from your savings because you are unable to qualify for a normal long-term care policy. Hybrids can also be useful if you have another whole life policy with a large cash value that you can roll over.
For information on other alternatives to long-term care insurance, please see parts two and three of this series.
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- 40% receiving long-term care are working-age adults, ages of
- About 70% over age 65 will need long-term care services in their
lifetime. By 2020, this number is expected to exceed 12 million.*
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