With the costs of long-term care services continually rising, preparing for long-term care expenses has become an essential part of most people's financial plan.
Besides traditional long-term care (LTC) insurance, there are several other alternatives to pay for long-term care services like nursing homes and in-home aides. Read on to discover some of the most popular ones, and the limitations of traditional standalone LTC insurance policies.
What are alternatives to long-term care insurance?
Alternatives to long-term care insurance range from self-insuring to purchasing a hybrid life and long-term care insurance policy or getting a reverse mortgage on your home.
Self-insuring with a retirement plan or savings account
The most straightforward alternative to long-term care insurance is saving money for future long-term care services. If your budget allows it, you can put aside a percentage of your income into a high-yield savings account or retirement plan. Opening a separate savings account for purpose can help you see how much you've set aside for long-term care expenses.
If you have an employer-sponsored retirement plan, like a 401(k) or 403(b), find out if your employer matches contributions. If so, try contributing at least the amount needed to get the maximum employer-match benefit. If you don't have an employer-sponsored plan, you can open an Individual Retirement Arrangements (IRA) account to set aside tax-deferred savings. You can do this through most major banks and financial institutions.
The two most common types of IRAs are traditional and Roth IRAs. The table below highlights some of the main differences between the two types of retirement accounts.
|Contributions may be tax-deductible
|Contributions aren't tax deductible
|Money in account isn't taxed until withdrawn
|Qualified withdrawals are tax-free
|Must start taking withdrawals at age 72
|No required withdrawals
Speak to a financial advisor to learn about other retirement plan options and determine which is the best for meeting your savings and long-term care needs.
Although saving enough money to pay for long-term care expenses is doable for some, it's not realistic for everyone. In 2021, the national median cost of a home health aide was $5,148 per month, and the national median cost of a private room in a nursing home was $9,034 per month. Saving up for these types of expenses requires you to put a significant amount of money into savings after covering everyday living expenses.
Hybrid life and long-term care insurance
Another alternative to traditional long-term care policies are hybrid life and long-term care insurance plans, which many of the best long-term care insurance companies offer. Hybrid policies are generally life insurance plans with built-in long-term care benefits. Many insurers also offer long-term care insurance riders as add-ons to their life insurance products.
Hybrid policies include a death benefit payable to your beneficiaries when you die. If you need long-term care, you can access a portion of the policy's death benefit to pay for the expenses, and your beneficiaries will receive a reduced amount. If you don't need to use the long-term care portion of the policy, your family gets the full death benefit.
To be eligible for long-term care funding through a hybrid policy or an LTC rider, a qualified health provider must diagnose you with a chronic illness. You may be considered chronically ill if you have severe cognitive impairment or can't complete activities of daily living (ADLs) — such as bathing, toileting, dressing and eating — without assistance.
Once you've qualified to receive LTC benefits, some policies let you access funds without restrictions on how you spend them. Others only pay or reimburse you for qualified expenses. Policies generally cover care in a variety of settings, including at home, in assisted living facilities, nursing homes or adult daycare centers.
Hybrid policies tend to be more expensive than their stand-alone counterparts. And you may not need life insurance if you don't have anyone who depends on you financially.
But if you do need life insurance, a hybrid policy can be a good option if you can comfortably afford the premiums. Unlike standalone LTC insurance, the premiums on hybrid policies are guaranteed not to increase over time. And, if you don't need to use the long-term care portion of the policy, it won't be lost entirely; instead, your family will receive a larger death benefit.
Annuities with long-term care riders
Annuities are yet another alternative to standalone long-term care insurance policies. These products can provide a guaranteed income stream throughout retirement in exchange for an upfront payment. As with permanent life insurance, annuities can be combined with a long-term care rider in order to cover qualifying long-term care expenses. These are often called long-term care annuities.
According to the Administration for Community Living (ACL), there are two main types of long-term care annuities: immediate and deferred annuities.
Immediate long-term care annuities
Immediate long-term care annuities provide a fixed monthly income stream for life or for a set period in return for an upfront premium payment. This option is available to applicants regardless of their health, even if they already require long-term care services. The monthly payment amount will depend on the annuitant's age, health and initial premium amount.
Deferred long-term care annuities
Deferred long-term care annuities are available to applicants up to age 85 who can meet certain health criteria. Like immediate annuities, you make a single premium payment and receive a fixed monthly income stream for a specified period.
Unlike immediate annuities, deferred annuities have two funds: one set aside for long-term care expenses and a cash portion that can be used in any way. The LTC fund is available immediately, but the cash portion can only be accessed at a specified future date. The rules of the annuity determine how much you can receive from both funds.
Deferred long-term care annuities may be considered tax-qualified long-term care policies, and your heirs can receive the long-term care portion of them if you never require care. However, this type of product could affect your eligibility for Medicaid.
With either type of long-term care annuity, you must make a large upfront investment and run the risk of not having enough each month to cover long-term care expenses. The ALC also warns that the tax implications of this type of product can be complicated, so prospective annuitants should consult their tax professional first.
Medicaid, the government-funded health insurance program, pays for some long-term care services, including those provided in nursing homes. However, there are strict limits on the amount of income and assets you can have to be eligible for Medicaid, and these vary by state and family size.
For many, paying out-of-pocket for long-term care for several months will reduce their savings enough that they'll qualify for Medicaid. But no one wants to burn through their savings to pay for care. And, for married couples, this could leave the healthy spouse destitute.
Giving away or transferring your assets for less than they're worth to become eligible for Medicaid can automatically disqualify you from receiving benefits. But some strategies, like retitling assets and investing in specific annuities or setting up a qualified income trust, can lower your recognized income and assets without disqualifying you for Medicaid. Since the laws surrounding this issue are complex, it's best to consult a knowledgeable attorney or financial planner.
Health savings accounts (HSAs)
Health savings accounts (HSAs) let you save pre-tax money to pay for qualified medical expenses while earning interest on your contributions.
According to Fidelity Investments, you can use an HSA to cover part of the cost of a long-term care insurance policy, provided it's tax-qualified. You can also use it to pay for qualified long-term care services such as nursing, whether provided at home or in a care facility.
To qualify for an HSA account, you must be enrolled in a high-deductible health insurance plan, such as a Marketplace plan. You can open an HSA at a bank or credit union. Alternatively, if you're enrolled in a high-deductible insurance plan through your workplace, you may be able to open an HSA through your employer.
Home equity conversion mortgages (HECMs)
A home equity conversion mortgage (HECM) is a type of reverse mortgage insured by the Federal Housing Administration (FHA). The program lets you borrow a portion of the equity in your home, which you can use for any purpose. The loan amount you may qualify for will depend on your age, the value of the home and the current interest rate.
To qualify for a HECM, you must be at least 62 years old, have a small mortgage balance or own the home outright and live in the property as your principal residence. Other borrower eligibility and property requirements apply.
According to the Consumer Financial Protection Bureau (CFPB), the loan must be repaid once the borrower dies, sells the home or the home is no longer their principal residence. That may pose a problem for single borrowers who plan to use the loan proceeds to cover their stay in a nursing home or assisted living facility.
If the borrower lived in a facility for 12 consecutive months and there were no co-borrower occupying the property, the loan would become payable and anyone else living in the home would have to move out.
The limitations of long-term care insurance
Traditional or stand-alone long-term care insurance policies can be more affordable than their hybrid counterparts. And paying a monthly premium can be much more accessible than having to make a large upfront payment, as you would with a life insurance annuity. However, as with almost every other option on this list, they have some limitations.
High annual premiums and rate increases
Annual premiums for long-term care policies are expensive, which can be a significant obstacle to obtaining coverage, particularly for seniors on a fixed income. According to the American Association for Long-Term Care Insurance (AALTCI), the following are the average annual premiums for a $165,000 long-term care policy in 2022:
- $1,700 for a healthy 65-year-old male
- $2,700 for a healthy 65-year-old female
- $3,750 for a healthy 65-year-old couple
Now, these sample figures don't include inflation protection, which helps your benefit grow at a fixed annual rate in order to keep up with the rising costs of care. Without this optional rider, you run the risk of not having enough in benefits to cover the cost of care by the time you require it.
As with life insurance, the younger and healthier you are when you purchase an LTC insurance policy, the lower your premiums will be. Just keep in mind that if you purchase your policy at a younger age, you'll probably pay premiums over a longer period before using the benefits. This could result in spending more over the long run, even if the monthly or annual premiums are lower.
Premiums on stand-alone long-term care policies aren't guaranteed to remain the same over the life of the policy. And if you never require long-term care, there's no way to retrieve your investment.
Eligibility requirements and underwriting challenges
Another drawback of traditional long-term care insurance policies is that they tend to have strict eligibility requirements. Long-term care insurance companies want to avoid taking on too much risk and may disqualify older individuals and those with health problems.
According to the AALTCI, 20% of applicants in their 50s were denied coverage for long-term care insurance in 2021. The figure is even higher for older applicants, with over 40% of applicants aged 70 to 74 being denied.
If you have pre-existing conditions or start looking for coverage later in life, you could find it hard or nearly impossible to get long-term care coverage. Or, the premiums can simply be unaffordable. In that case, you may want to consider an alternative to long-term care insurance.
Long-term care coverage limitations and exclusions
Even the best long-term care insurance policies have coverage limitations and exclusions. Most policies have a daily benefit and lifetime benefit maximum. If your daily expenses exceed your daily benefit maximum, you'll be responsible for paying the difference. And if your total expenses exceed the policy's lifetime maximum, your coverage will end, and you'll be responsible for paying all future costs.
Another limitation to be aware of is the policy's elimination period. The elimination period is the time between when you first start incurring long-term care costs and when your policy begins paying for those costs. The longer the elimination period, the higher your out-of-pocket costs. But choosing a shorter elimination period will increase the cost of your policy.
Policies generally have exclusions as well, which are circumstances in which your policy won't pay for long-term care expenses. Common exclusions include:
- Mental health disorders
- Alcoholism and drug addiction
- Illnesses that result from acts of war
- Self-injury or attempted suicide
Potential for premium increases over time
Since premiums for traditional long-term care insurance policies are not guaranteed, they may increase over time. In fact, these products have been subject to significant rate increases since their launch.
Past rate increases for traditional LTC insurance products had to do with the limited data insurers had on which to base product assumptions. So, insurance companies underestimated the number of policyholders who would require long-term care services and the number of years they would require care. At the same time, they overestimated the number of people who would let their policies lapse.
If you prefer predictable long-term care financing options that won't increase over time, consider a hybrid long-term care insurance policy.
When should you buy long-term care insurance?
The best time to buy LTC insurance is when you're healthy. If you have a pre-existing medical condition, you may not be eligible to purchase a long-term care insurance policy. And if you are eligible, your premiums will be higher. The older you are, the higher your premiums will be as well. You'll want to have a policy in place well before you need to use it.
Summary of Money's alternatives to long-term care insurance
Traditional long-term care insurance policies have some limitations. While they may be more affordable than other options, premiums are not guaranteed and can increase over time. Additionally, if you don't require long-term care services, there is no other way to recoup your investment.
If you're not sold on traditional long-term care insurance, there are several other options available. If you have the means, you could self-insure by setting money aside in a separate savings or retirement account.
You could also look into other insurance and annuity products, including hybrid life and long-term care insurance and annuities with a long-term care insurance rider. With either of the last two options, your long-term care benefit is not lost if you end up not needing care.