What Is Asset-Based Long-Term Care?

Asset-based long-term care (LTC) is a financial strategy that combines traditional long-term care insurance with asset-based products like life insurance or annuities. These plans allow individuals to leverage their savings to fund potential long-term care needs while maintaining flexibility in how funds are used. Asset-based LTC solutions often provide a death benefit if care isn’t needed, offering a dual-purpose approach to financial planning.

If you need help planning for long-term care, consider speaking with a financial advisor.

Asset-Based Long-Term Care Definition

Asset-based long-term care is a hybrid approach to managing long-term care needs that integrates financial products like life insurance or annuities with long-term care benefits. Unlike standalone long-term care insurance, which solely focuses on covering care expenses, asset-based LTC provides additional financial features.

For example, the funds used for coverage typically remain part of the policyholder’s estate, either as a death benefit or as accessible cash value. This allows you to leverage your death benefit to pay for nursing care costs or in-home care.

Normally, life insurance pays a death benefit to your beneficiaries when you pass away. This money can then be used to pay for funeral and burial expenses. Also, it can cover day-to-day living expenses for your loved ones, wipe out debts or meet other financial needs.

With an asset-based long-term care policy, you can accelerate your death benefit payout. You can tap into benefits from the policy to pay for long-term care if the need arises. But let’s assume that you stay healthy and don’t require long-term care. In that case, the entirety of the death benefit could be paid out to your beneficiaries after your death.

This is both similar to and different from a life insurance policy that includes a long-term care rider. With this option, you essentially have two policies in one. One part pays out benefits for long-term care during your lifetime. The other pays out a death benefit. In that case, you buy a life insurance policy first and add the long-term care rider as a secondary benefit. Asset-based long-term care insurance pays benefits for long-term care first and death benefits second.

How Asset-Based Long-Term Care Insurance Works

SmartAsset: What Is Asset-Based Long-Term Care?

When you purchase asset-based long-term care insurance, you’re buying is either permanent life insurance or an annuity. The latter is also an insurance contract. A permanent insurance policy is whole life insurance. It covers you until your death as long as premiums are paid. Whole life insurance can accumulate cash value over time. The money you pay in premiums earns interest.

With an annuity, you pay premiums that the annuity pays back to you when you need long-term care. Asset-based long-term care coverage through a whole life insurance policy and annuities are both living benefits. They pay out during your lifetime.

This type of insurance usually requires an upfront premium payment. However, that’s the only premium you’ll pay. Depending on the insurer, you may have the option to pay premiums monthly. That’s similar to traditional long-term care insurance, which allows lump-sum or monthly payments. Once you need long-term care, your asset-based coverage pay out.

You can fund the plan with a variety of different assets. For example, you can use money from savings or a retirement account. You also may use home equity, an existing whole life insurance policy or an annuity. The latter offer some flexibility when tapping into your assets.

What If You Don’t Need Long-Term Care?

It’s possible that you may never need long-term care. That’s where an asset-based insurance policy can pay off. If you don’t use long-term care benefits, the policy passes to heirs tax-free at the time of your death. Either way, you’re guaranteed to get value for your premiums.

Depending on how the policy is structured, you may also cash out and surrender your coverage. You might do this if you don’t anticipate needing long-term care coverage. You can invest the money elsewhere, or purchase a traditional long-term care insurance policy instead.

However, cashing out an asset-based long-term care plan may trigger a surrender charge. This surrender charge is typically a percentage of the policy’s value so if you have a significant amount of coverage, the surrender fee could be on the steep side.

Pros and Cons of Asset-Based LTC

On the upside, the policy guarantees a payout. It may be long-term care benefits paid to you or a death benefit paid to your beneficiary. However, it’s important to consider both the cost and the benefit amounts you can receive with asset-based long-term care coverage.

Advantages

Dual purpose: Asset-based LTC policies combine long-term care benefits with life insurance or annuities, ensuring funds are utilized either for care or as a death benefit for beneficiaries. This eliminates the “use it or lose it” concern associated with traditional LTC insurance.
Flexibility: These policies often allow policyholders to access cash value or withdraw funds if long-term care isn’t needed, offering more control over their financial resources.
Simplified underwriting: Asset-based LTC policies may have less stringent health requirements compared to traditional long-term care insurance, making them accessible for those with pre-existing conditions.
Tax advantages: Long-term care benefits from these policies are often tax-free and premiums paid with after-tax dollars may qualify for tax deductions under certain circumstances.

Disadvantages

High upfront costs: Many asset-based LTC policies require substantial initial payments, which can be a barrier for those with limited liquid assets.
Reduced liquidity: While flexible, committing significant funds to these policies can limit their availability for other financial needs or emergencies.
Complexity: Understanding the terms and mechanics of hybrid policies may be challenging, requiring thorough research or professional advice.
Limited growth potential: Compared to standalone investments, the cash value within asset-based LTC policies typically grows at a slower rate, which may not suit those seeking higher returns.

Bottom Line

Asset-based long-term care can relieve some of the financial pressure that goes along with paying for nursing care. This kind of plan could help reassure you and your family by covering your long-term care needs. Meanwhile, it can leave behind a death benefit for your loved ones.

Long-Term Care Planning Tips

While researching asset-based long-term care, consider other options. For example, those might include a long-term care annuity. Also, you may consider a life insurance policy with a long-term care rider or short-term care insurance. Compare the cost and benefits of each one. That can help you narrow down which one may be the best fit for your needs and budget.
Consider talking to a financial advisor about asset-based long-term-care and other ways to pay for the care you may need. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.