Long term care can be a bottomless pit of expenses, and just a year of care in semi-private nursing homes can cost upwards of $150,000. Surprisingly though, only one out of every ten people in the U.S. have a plan that covers long term care, and less than eight percent are covered by a long term care insurance (LTC).
This is all the more troubling when you consider that about 70% of people will probably require long term care sometime in their lives!
Why Aren’t LTC Plans More Widely Accepted?
These disturbing statistics may in part be attributed to the drawbacks of traditional LTC insurance plans. They can be quite expensive and elderly people or those with health issues might not qualify easily (basically, those who would probably need it the most).
The biggest concern people have is probably the use-it-or-lose-it condition, which makes these policies a bit of a gamble. In case you never need long term care, you’ll probably have to forgo the entire amount you paid.
LTC Alternatives that Can Help You Protect Your Investment
There is some good news in the form of innovative alternatives that are more attractive, even for those who already have already invested in an LTC plan. We’ve listed 5 alternatives here for funding long term care, which can help to keep your investment safe or even offer better benefits.
- Life InsuranceThere are quite a few ways you can utilize your existing life insurance policy, or invest in another, to provide the funds you may need for long term care. With some of the offerings available in certain life insurance policies, increasing your premiums for a higher death benefit might be a better option.
- Tax Qualified Long-Term Care Riders – Life insurance policies that offer LTC riders are becoming very popular, as they offer a hybrid structure that is highly flexible. The majority of the policies death benefit can be utilized to pay for long term care if needed. If the policy holder dies, the remaining amount is still paid to the nominated beneficiary as a death benefit.
- Cash Value Withdrawal and Loans – If you invest in a policy that features a cash value, you can make withdrawals from the accumulated value or take loans against it to pay for long term care. Be aware that you could lose money and the proceeds may be subject to income tax, so you should research the policy terms thoroughly before using the cash value in any form.
- Life/Viatical Settlement – The life settlement option available in certain life insurance plans can give significantly higher returns, up to three times of the cash value option. Terminally ill policy holders have the option of a viatical settlement, the proceeds of which are generally not subject to income tax. The amount of the settlement is determined by the policy’s benefits and how long they’re expected to live.
- Hybrid AnnuitiesApart from life insurance, a range of hybrid annuities are available with linked benefits to cover expenses for long term care. These combine the regular income from the annuity with the benefits of LTC riders. Fixed annuities with long term care riders have quite a few advantages over LTC insurance, such as:
- With a hybrid annuity, you can invest the amount you would save for long term care or LTC insurance in an annuity that provides a fixed income during the agreed term. In case you need long term care, they give you higher payouts during that period, sometimes up to triple the amount.
- Most LTC insurance policies require periodic premium payments that continue for life, while annuities can be purchased with a single lump-sum payment and guaranteed returns. Additionally, LTC insurance premiums can vary significantly over time, so your investments are safe with an annuity.
- Some annuities with LTC riders have a higher interest rate on the principal when long term care is needed. Additionally, according to the Pension Protection Act of 2010, the payouts at this time are not taxable as income.
- Traditional Income AnnuitiesSometimes the easiest ways are the best. If you’re unable to qualify for a product that offers LTC benefits or you’d rather stick with tried-and-tested sources, a traditional income annuity is an excellent option. They offer a more flexible investment option with some attractive benefits, which can be used for long term care if needed.
- Income annuities will continue to payout income regardless of whether you require long term care or not. You can continue to build your income during retirement by purchasing annuities over time, and use these funds to supplement your pension and spread out LTC expenses.
- With deferred income annuities, you can start investing at a younger age so you end up with higher payouts at a later stage, which is when you’re more likely to need long term care anyway. The deferral period and payout at a later age means much better returns over time, so look into this option too.
- Perhaps the biggest advantage of investing in annuities is you don’t have to make a fixed commitment for monthly premiums. They can be purchased with lump-sum single or multiple payments which are converted into guaranteed income, so you can choose when and how to invest your funds.
- Reverse MortgagesAnother option for funding long term care at home is line of credit reverse mortgaging. Since repayment can be extended as long as the last homeowner borrower resided in the home, it can be used if you require long term care in your home. The payouts from reverse mortgages can be in the form of lump-sum or monthly payments. However, it might not be of much use if your condition forces you to be in an assisted living facility, nursing home or similar circumstances.
- 1035 ExchangesThanks to the Pension Protection Act of 2006, even traditional life insurance policy holders may be able to benefit from hybrid policies. The act allows for 1035 like-kind exchanges for annuities and life insurance policies to hybrid products with LTC benefits and riders. This 1035 exchange removes the taxable gain on the value of the insurance or annuity. Simply put, you won’t pay any taxes on any increase in the payouts for qualified expenses.While the guarantee of the investments being utilized and providing assured returns is lucrative, the benefits may be significantly lower if you do need long term care. There are a host of options available, but the most crucial decision is to start planning. You should weigh the advantages of each option carefully and take into account any probability of needing long term care during your lifetime.