Long Term Care Alternatives
Long term care (LTC) is important as Americans live longer and fewer people live with their children once they are no longer able to care for themselves. Long term care insurance plays an important role in ensuring that you can afford the care you need in the future while also protecting your assets from being used up. There are two main types of LTC alternatives: hybrid plans and universal life plans with riders. Both options have advantages that traditional LTC plans do not.
Traditional Long Term Care
Traditional LTC is still extremely common because it is the easiest to understand. It is often referred to as nursing home care. These plans have defined benefits with a set inflation amount and an elimination period. Most have a set number of years of coverage while some of the older policies still have lifetime benefits.
These plans are less expensive, but often take large rate increases and there is the potential that you may not use the benefits. This is the hardest part of the plans for people to come to terms with and it is often the reason people choose not to purchase one of these policies. Many individuals worry about paying in tens of thousands of dollars over the years and then dying without ever having used long term care. However, going without a plan for potential long term care however can be extremely risky. The average cost of care in the state of South Dakota is over $50,000 a year and if you are diagnosed with an illness such as Alzheimer’s, which is on the rise in the U.S., you could spend several years paying for care.
Hybrid plans are plans that combine LTC with life insurance. They are more flexible in how they can be utilized. These are not “use it or lose it” plans. You can get benefits from hybrid plans in three different ways: as a death benefit, return of premium, or as long term care when you need it. These plans have life insurance intertwined with them to give you more flexibility in how you use the policy.
Hybrid policies tend to be more expensive than the traditional plans but for many they help calm the fear of “what if I never use it?” and that makes the added expense worth it. You know you will be getting something for your money, even if it’s just a return of the premium you paid in.
Life Insurance Riders
There are riders that can be attached to Universal Life insurance policies that will provide coverage for LTC needs. For some policies these riders are attached automatically with no cost and with others it can be added to a policy for a very low cost compared to hybrid plans. There are a few different types of riders that can be added to a life policy:
- Accelerated Death Benefits- This type of rider enables you to use the death benefit before you die in order to pay for care.
o Chronic Illness- similar to LTC, but you have to be able to prove you will never be able to perform 2 out of 6 daily functions listed in the policy for the remainder of your life. In most cases a doctor has to help prove this. Please note this is not actually considered LTC insurance and comes at a cost once initiated.
o Terminal Illness- If your doctor tells you that you only have a set time to live you can accelerate your death benefit up to 75% to cover the cost of care. Again, this is not considered actual LTC insurance and comes at a cost once initiated.
- Long Term Care Rider- this type of rider acts similarly to traditional LTC policies. They have a set benefit with inflation and elimination periods while having a death benefit attached in case you never use it. This is often a tax qualified LTC plan under IRC 7702(b).
Universal Life insurance paired with one of these riders can be a great substitute for LTC insurance because these policies can build up cash value that you can use should you need to as well as using one of the riders to help.
Benefits of LTC Alternatives
There are two important benefits to having some form of LTC coverage and, depending on what you need, the alternative plans can be the most beneficial to you. The first important benefit is that it pays for your care when you are no longer able to care for yourself without placing the burden on family. With the alternative plans you are also protecting your investment into long term care. You will not have to worry about losing the premium you have paid into your plan.
Also with the alternative plans the benefits are guaranteed. You know what your premium is going to be and you will not risk large rate increases over the years that will make you choose between letting go of a policy and lowering your benefits to keep the cost down.
One of the best aspects of hybrid plans is that you do not have to pay premiums forever and risk rate increases. This makes them more expensive, but it can be a blessing for those who can use it. One way to pay the policy is to pay it in one lump sum. You can pay for the entire policy and then know it is all taken care of. This works well for people who have a large sum of retirement money sitting but may not be able to afford monthly premiums. You can use qualified money from IRAs and such to pay for these.
Another way to pay for the policies, without paying every year until you are ready to go on claim, is to choose a limited pay option. For example, you may choose to pay for the policy over a span of ten years. For someone in their 50 or 60s this is a great option because it allows for them to pay for the entire policy before they retire, ensuring that the cash flow is there to pay premium and allowing them to worry less after the income is no longer there.
Which to choose?
Everyone’s situation is different and there are options and variations to go over when deciding what type of plan will work best for you. Long term care is important and necessary but you want to make sure you are picking the best policy for your situation. A traditional plan may still be best for you, but one of these alternatives may work better if you can afford them. To find out what the best plan for you will be contact us at 1(800) 669-3959 and we can connect you to an agent in your area.