Alternatives to Long-Term Care Insurance
Part 4: Annuities, Pensions, Life Settlements, & More
For some, long-term care insurance is the best way of funding care-related expenses later in life. However, the high costs associated with long-term care insurance have led many people to look into alternatives. 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 LTC insurance.
In part one of this series, we looked at hybrid life insurance/long-term care insurance policies. Part two explored short-term care insurance and the idea of paying for your care out-of-pocket. Part three focused on Medicare, Medicaid, Social Security, and Supplemental Security Income. Here, we discuss annuities, life settlements, receiving help from friends and family, and other options not covered in our previous articles.
Assistance from Friends & Family
When considering how you’ll pay for long-term care services, it is important to ask yourself just how much care (and thus how much coverage) you will need. This number can be lessened by having friends and family provide at least some of your care. Some long-term care insurance policies will even allow you to hire family members as care providers.
Most experts do not recommend relying entirely on family for one’s long-term care, though. While it may seem like an appealing, low-cost option, it can take a toll on people both physically and financially. It can also lead to strained or damaged relationships within the family. Overall, while asking friends and family for assistance can be a great way to reduce the amount of paid long-term care you require, it is not reasonable to expect them to do all of the work. Instead, discuss the idea with them and decide on what arrangement seems best, then plan on using long-term care insurance or one of the other strategies discussed here to help cover the remainder of your long-term care needs.
Selling a Life Insurance Policy
If you have a life insurance policy, one option is to sell it and put at least some of the money you receive towards long-term care expenses. Doing this is called a life settlement or viatical settlement and generally gets you more money than would surrendering the policy for its cash value. However, it can still be difficult to tell whether you are getting a fair price for your policy.
Another disadvantage of doing things this way is, of course, that your heirs will no longer receive a death benefit when you pass away. That benefit will instead go to whomever purchased the policy from you. The proceeds that you receive from doing this may also be taxed. Last but not least, this option is not available for all types of life insurance policies. For example, term life insurance policies will generally not offer these types of settlements.
Annuities are a frequently overlooked option when it comes to paying for long-term care. You can purchase an immediate annuity that will provide a steady stream of income that you can then use to pay for the costs of long-term care. With this type of annuity, you pay a one-time lump sum in exchange for a guaranteed stream of income from the insurer. Some companies even offer immediate annuities specially designed for people who require long-term care. The income gained through this kind of annuity can last for a predetermined amount of time or could continue for the rest of your life. The amount you receive will vary depending on the amount you paid as well as other factors such as age, health, and gender.
One of the great things about these annuities is that you can purchase one even if you aren’t in great health. In fact, you may qualify to receive a higher annual payout if you’re sick. The downside is that they do require a large upfront payment, often of $50,000 or more. And there is always the concern that the money you receive from your annuity will not be enough to fully cover your expenses. Annuities can also cause complications when it comes to taxes. If you are thinking of purchasing an immediate annuity, talk to a tax advisor who can help you understand the changes that it will cause for your future taxes.
While the large lump-sum required to purchase an annuity is problematic for many people, they are still one of the more affordable options when you look at the bigger picture, as the overall cost could still be significantly lower than what you would have spent on long-term care insurance premiums. However, it is also worth noting that like the hybrid policies discussed in a previous article, immediate annuities do not provide much interest and thus are not fantastic investments.
Additional Sources & Strategies:
- Health Savings Accounts:if you have an eligible high-deductible health insurance plan, one option is to get a health savings account. These accounts allow you to put money aside (tax-free) for medical costs, including costs related to long-term care. They can also be used to pay long-term care insurance premiums.
- Pensions:A retirement pension can help pay some of the monthly costs associated with long-term care. However, the viability of this strategy will depend on the size of the payments you receive and the amount of care that you require. In general, relying solely on a pension is not a great solution, as the payments will likely not be enough to cover all of your long-term care expenses.
- Veterans Aid & Attendance Pensions Benefit:the federal government guarantees veterans and their spouses some assistance with long-term care. Also known as the A&A benefit, this program provides money to veterans and/or their spouses. The exact amount you can receive through this program will vary based on the situation, with single veterans, surviving spouses, and veteran/spouse couples all receiving different amounts. The money gained through this program is tax-free and can be used for in-home care, assisted living, or a private nursing home. This can be highly advantageous since some of these services are not covered under programs such as Medicare and Medicaid. You must meet certain qualifications regarding medical and financial needs to apply, and you or your spouse must also have completed at least 90 days of active duty. It should also be noted that it may take six to eight months to be approved after you have sent in your application.
- Home Equity & More:your home can be an incredibly valuable asset. You can choose to tap into home equity through a line of credit to help pay your bills. You may also consider taking out a reverse mortgage or selling the house outright and downsizing.
Chances are good that you will require some form of long-term care later in life, and figuring out how you will fund such care is an important step in any retirement plan. There are benefits and drawbacks both to long-term care insurance and to the alternatives listed in this series. Take some time to weigh your options, consider your budget and priorities, and pursue the choice that is best suited to your unique situation. Talk to a trusted financial advisor, ask questions, and get their opinion. Planning and budgeting for this kind of thing may not be fun, but it is an important step in planning your future.
If you haven’t already, take a look at the previous installments in this series to learn more about alternatives to long-term care insurance. We also offer articles on the costs of LTC insurance, the types of services it covers, the pros and cons of purchasing an LTC policy, and more.
More Useful Links:
Tips for Finding & Meeting with your Long-Term Care Insurance Agent