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Alternatives to Long-Term Care Insurance

Rebecca Lake
Two hands holding each other

Anticipating long-term care needs is an important part of retirement planning, as long-term care can quickly eat into your savings. The average yearly cost of nursing home care in a semi-private room was $90,155 in 2019, according to Genworth Financial, rising to $102,200 for a private room. Long-term care insurance can help, but these policies can be costly. If you’re trying to close a funding gap in your retirement plan, these alternatives to long-term care insurance are worth a look.

1. Life Insurance Living Benefits

Life insurance can help provide financial peace of mind to your family members if you want to leave something behind to cover funeral expenses, pay off the mortgage or manage other costs. But your life insurance policy may be able to do more than that if it includes a living benefits rider.

This type of rider would allow you to access some of the policy’s death benefits while you’re still living to help pay for long-term care. As alternatives to long-term care insurance go, a life insurance policy that includes a living benefits rider may be a more affordable option. One downside to keep in mind, however, is that tapping into death benefits during your lifetime means there’ll be less to pass on to your beneficiaries when you pass away.

2. Life Insurance Cash Out

There are many types of life insurance. Permanent life insurance policies may allow you to build cash value over time. For example, you may have a universal life policy that offers a death benefit but also has an investment component. The investment part of the policy would grow with interest, either at a fixed or indexed rate over time.

While a permanent life insurance policy with cash value accumulation can be more costly than a term life policy, there’s an advantage in situations where requiring long-term care seems likely. You could either borrow against the policy’s cash value in the form of a loan or cash out the policy completely.

Both are alternatives to long-term care insurance that would give you cash to pay for nursing care costs. Of course, you may end up reducing the death benefit of the policy if the loan isn’t repaid and cashing out the policy could leave you with no life insurance coverage at all.

3. Hybrid Life Insurance

Hybrid life insurance policies offer the best of both worlds when you’re looking for alternatives to long-term care insurance. On one hand, you have a death benefit that’s paid out to your beneficiaries when you pass away. Again, that money could be used to pay off debts, manage funeral and burial expenses, help put your kids through college or meet other financial needs your loved ones have.

The other part of the policy is designed to pay for long-term care. The beauty of a hybrid policy is that if you stay healthy and don’t require long-term care, that part of the policy would also be paid out as a death benefit. It’s a win-win, in the sense that both your long-term care needs and the financial needs of your beneficiaries would be covered.

The trade-off is that instead of paying premiums monthly, you might be required to make a large premium up front to cover the long-term care portion of the policy. That might not be the best option for you if you don’t have a lot of cash in reserves or assets you could liquidate to get the cash needed to pay the premiums.

4. Annuity Income

Woman in a wheelchair

An annuity is a type of insurance contract that can be used to generate income for retirement. Annuities can be immediate, meaning you can start receiving payments almost right away, or deferred, meaning the payments begin at a future date.

Annuities can be used to supplement a 401(k), IRA, pension, social security or other retirement savings but they can also be handy alternatives for long-term care insurance. You could simply earmark some or all of your regular annuity payments for long-term care costs for yourself, or your spouse if you’re married.

One potential snag to keep in mind is what can happen if you need to take money from the annuity before your regular payments are scheduled to begin. The annuity company may impose a surrender charge, assessed as a percentage of your annuity benefits. That, along with taking money from the annuity early, can shrink the amount you’ll receive later once payments begin.

An annuity that features a guaranteed lifetime withdrawal benefit (GLWB) could help you sidestep that situation. A GLWB is essentially an add-on to an existing annuity that allows you to take early withdrawals without paying a surrender charge. Keep in that there’s typically an extra cost to add this on and there may be an annual cap on how much you can withdraw.

5. Short-Term Care Insurance

Short-term care insurance covers you for nursing care needs but the difference is that you’re covered for a shorter time frame. A regular long-term care policy, for example, might pay for nursing care for two to three years. Short-term care insurance, on the other hand, might only cover you for a few months or up to one year max.

The upside is that short-term care insurance may come with lower premiums than long-term care insurance. You may also find it easier to qualify for a policy. What you have to consider with this kind of insurance is how likely you are to need nursing care and how long it may last. If you end up living in a nursing home for longer than one year, you’ll have to seek out other alternatives to long-term care insurance to keep up with the ongoing costs.

6. Reverse Mortgage

A reverse mortgage is another way to create a stream of income for retirement. With this long-term care funding option, a reverse mortgage lender makes payments to you based on the value of your home. You can then use that money to pay for long-term care or other needs.

There are some cons, however, starting with the fact that there are certain requirements you have to meet to be eligible for a reverse mortgage. And once you move out of the home and into a nursing care facility, the amount you received from the reverse mortgage lender must be repaid in full. If you don’t have the resources to cover it or your children aren’t able to pay, the home may have to be sold for the lender to be paid back.

7. Self-Pay for Long-Term Care

A Medicare card

So far, these alternatives to long-term care insurance have involved purchasing another investment or insurance product. Self-paying, on the other hand, requires a different strategy.

With this option, you’re saving or investing money regularly so that you have it in reserves if you end up needing long-term care. This approach requires discipline and some number crunching to make sure you understand how much you need to save and how much that money needs to grow to meet your needs.

If you’re considering the self-pay option, consider the best places to keep this money. For example, you could stash it in a savings account, which would be safe but it may not earn a ton of interest. On the other hand, you could invest it in mutual funds or exchange-traded funds, which are riskier but could offer higher returns. Or, you might decide to split the difference and spread your money across a mix of safer and riskier investments.

8. Medicaid and Long-Term Care

Medicare doesn’t pay for nursing home care but Medicaid can if you’re eligible. The catch is that eligibility is based on your income and assets, meaning that if you have too many assets you may need to spend some of them down first to qualify. Spending down assets may not be ideal if you’re hoping to leave a financial legacy for your children or grandchildren so this may be the last of the alternatives to long-term care insurance you’re willing to explore.

The Bottom Line

Long-term care insurance can help preserve your retirement assets, but the premiums can be pricey. Not to mention that if you buy long-term care insurance and never need nursing care, you can’t recover the money you already paid in. Researching alternatives, such as life insurance, to long-term care insurance can help you decide whether to buy a policy or to look elsewhere when planning for nursing home costs.

Tips on Paying for Long-Term Care

  • If you or a loved one needs long-term care consider talking to a financial advisor about how to pay for it. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • As a general rule of thumb, you might begin thinking about long-term care insurance or alternatives in your 50s. If you decide on or want to consider life insurance use this calculator to gain insight on how much you should buy.

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