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What Is Asset-Based Long-Term Care?


As you plan your retirement future, consider your options for long-term care. In-home or nursing home care can be expensive. But certain financial products can help. Asset-based long-term care insurance combines long-term coverage with life insurance. While a financial advisor can help you devise a plan for long-term asset-based care, here’s how it works.

Asset-Based Long-Term Care Definition

Asset-based long-term care insurance is a life insurance policy. It allows you to leverage your death benefit to pay for nursing care costs. 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

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.

As long as the money from an asset-based long-term care plan goes toward long-term care expenses, the benefits pay out tax-free. The money that you pay into the plan grows with interest. So, if you decide to surrender it, you’ll get a return on what you paid in for premiums. And having this kind of coverage in place can help you avoid having to drain your retirement assets in order to qualify for Medicaid if you have no other way to pay for long-term care.

However, it’s important to consider both the cost and the benefit amounts you can receive with asset-based long-term care coverage. Long-term care insurance products tend to be more expensive than traditional life insurance so that’s something to consider. You should also be aware of how much the plan will pay out if you need to use your long-term care benefits. Typically, these plans cap the benefits paid for long-term care. If your care costs exceed the benefit amount, that may leave a funding gap that you’ll have to make up.

Bottom Line

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

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.

Investment Tips

  • Consider talking to a financial advisor about asset based long term care. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve 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.
  • 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.

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