Everyone should prepare for the possibility of long-term care expenses later in life. But traditional long-term care insurance isn’t for everybody.
You may need to consider one or more alternatives to long-term care insurance if you can’t afford the premiums or if you don’t qualify for coverage. Others look for LTC insurance alternatives because they don’t want to pay for pricey insurance they may never use.
Below are some of the common financial alternatives to paying for long-term care without depending on a long-term care insurance policy.
- Health savings accounts
- Critical illness insurance
- Hybrid long-term care insurance
- Short-term care insurance
- Home equity
Let's take a closer look at each.
If you are covered by a high-deductible health insurance plan, you are eligible to open a health savings account (HSA).
An HSA is a tax-preferred savings account that enables users to set aside tax-free dollars to pay for health expenses, including regular medical care, dental and vision expenses. It can only be used in conjunction with a high-deductible health insurance plan.
If you take the premium you would pay for long-term care insurance and save it instead to an HSA, you can build up a sizable account to use for long-term care if you need it. And if you don’t ever need long-term care, you can still use your HSA funds for nearly any type of out-of-pocket health care expense.
The potential downside of relying on an HSA is that you may not build up enough in the account to fully cover long-term care.
In addition, there is also an IRS limit to how much you can save each year in an HSA. In 2020, the maximum contribution amounts are $3,600 for individuals and $7,200 for families. You can contribute an additional $1,000 if you are 55 and older.
[ Related: HSA vs. FSA: Which is better for you? ]
Critical illness insurance (CII) is a type of supplemental insurance that pays a lump sum benefit if you are diagnosed with a covered illness.
It is designed to help people cover the cost of treating and recovering from expensive illnesses and procedures, such as heart attacks, strokes, and cancer.
One of the advantages it has over long-term care is that CII pays a lump sum, and there are no restrictions on what the money can be used for. The benefit can help cover long-term care expenses or other costs, such as deductibles, physical therapy, prescription drugs, and even your regular bills while you’re recovering.
The downside of CII compared with LTC is that CII only provides a benefit if you are diagnosed with one of a handful of critical illnesses. Historically, critical illness plans have focused on acute conditions. The most common covered conditions include cancer, heart conditions, stroke, and organ damage, including transplants. Some policies may also provide coverage for less common conditions, such as blindness, deafness, ALS, cystic fibrosis, severe burns, major head trauma, and coma.
CII policies generally do not cover chronic conditions such as diabetes, asthma, or multiple sclerosis. They also do not cover pre-existing conditions.
Another potential disadvantage of CII is the benefit amount. The insurer may offer a number of lifetime benefit amounts, typically ranging from just $10,000 to $50,000. You may be able to find a policy with lifetime maximums of up to $500,000.
Many insurance carriers offer hybrid long-term care insurance. This is a policy that combines long-term care insurance with life insurance. Or in some cases, you can combine long-term care insurance with an annuity.
Many life insurance policies and annuity contracts have optional long-term care riders. These riders provide monthly payments if the insured becomes confined to a nursing home or other long-term care facility.
Another option is a linked benefit hybrid policy. In this type of policy, life insurance coverage and long-term care coverage are linked.
This may be a good option if you’re already in the market for a life insurance policy or annuity contract and you want additional long-term care coverage. You need to make sure you understand the rider provisions and the benefit amounts if you elect to use a hybrid policy as an alternative to a traditional long-term care insurance policy.
Short-term care insurance is similar to long-term care insurance. The main difference is how long the policy will provide coverage. You can think of the difference as similar to the difference between short-term and long-term disability insurance.
Most short-term care insurance policies provide coverage for a year or less. They also begin paying benefits immediately when care is needed, compared with long-term care policies that may have a 90-day waiting period.
Short-term care insurance may be a viable option because it will be more affordable. Also, according to the American Association for Long-Term Care Insurance (AALTCI), about 49 percent of long-term care insurance claims last a year or less.
Another advantage of short-term care policies is that they will pay benefits even if you are receiving benefits from Medicare. Traditional long-term care insurance policies are prohibited from doing that.
On the other hand, for every short-term claim, there are others that last longer than one year. Long-term care insurance policies can provide benefit periods of two to five years or more, and even lifetime coverage.
Learn More: Short-Term Care Insurance
An annuity is a contract with an insurance company. You make a single purchase payment or a series of payments to the company. In exchange, the company promises to make regular payments to you or a payee you specify, starting at a specified date for a designated period of time.
You can get a deferred annuity. This is a contract where you pay the premium now and receive the income stream in several years. As a long-term care insurance replacement, that means you can invest today in an annuity, then withdraw income if you require long-term care. If that day never comes, you can use the annuity income for other purposes or you can even pass it along to a named beneficiary when you die.
There are also immediate annuities. This is when you pay a large sum of money to the insurance company and immediately receive income payments. If you have a large amount of savings at the time you need long-term care, you can put it into an immediate annuity and use the income stream to pay for your long-term care.
There is no underwriting to qualify for an annuity and you can get one regardless of your health. There can be age restrictions, however.
Also, keep in mind that an annuity income stream may not be enough to cover the full cost of long-term care.
Depending on when you bought your home, by the time you need long-term care, you should have significant equity, which is the difference between its value and what you still owe on it. You may even have your mortgage completely paid off.
You can turn that equity into cash to help pay for long-term care costs if needed. This can be done through:
Home equity loan
This is a type of mortgage loan that allows you to borrow money using your home’s equity as collateral. Like your primary mortgage, a home equity loan is secured by your home. Most lenders will allow you to borrow up to 80 percent of the equity in your home. So if you have $100,000 in equity, you can borrow up to $80,000. One of the advantages of using a home equity loan is that, like a standard mortgage, the interest is tax-deductible. Plus, you can take 10 or more years to repay the loan. One downside is that if you default on the home equity loan, the lender can foreclose on your house.
A reverse mortgage
A reverse mortgage is a special type of loan available only to seniors who have little to no mortgage balance on their homes. A lender will give you a lump sum loan based on the value and equity of your home that you either pay back month-to-month or with the proceeds of selling your home. You continue to own the home during the loan period, however, the loan needs to be repaid in full upon your death or when the home changes owners. Reverse mortgages are complex products, so seek professional advice before entering into this type of agreement.
Selling your home
Lastly, you have the option of selling your home to pay for long-term care. This is especially true if the ailment forcing you into long-term care will prevent you from living alone in the future. The potential downside is that when you need money for long-term care, the housing market may be such that you have trouble selling your home.
There are advantages and disadvantages to each of the above options. You are advised to seek the assistance of professional financial advisors and insurance agents to determine the best option for your potential long-term care coverage needs.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.