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Asset Based Long Term Care

The majority of American’s don’t own long term care insurance policies, yet many will need long term care during their lifetime. So why no insurance? Traditional long term care insurance doesn’t guarantee a payout—it’s a ‘use it or lose it’ type of product. 

What if there was an insurance product that did guarantee a payout? And it could be funded in a variety of ways? And what if it could keep more wealth in your family? Well, there is. It’s called asset based long term care insurance.

What is asset based long term care?

Asset based long term care (LTC) is a type of life insurance product that covers certain healthcare costs like nursing homes, hospice care and other long-term care options. It works like a regular permanent life insurance policy and pays out a death benefit to designated beneficiaries, but if you need care later in life, you can access the death benefit of your policy while you’re still living.

What’s the difference between asset based LTC and a long term care rider?

The difference between asset based long term care and a long term care policy rider is how they are funded. Essentially, with an asset based LTC policy you fund your long term care first. If you don’t end up needing care, funds go to your beneficiary in the form of a death benefit. Its primary purpose is to take care of health costs not covered by health insurance.

With a long term care policy rider, you fund the death benefit of your permanent life insurance policy first. If you do end up needing an advancement on the death benefit of the policy for care, it can be used as a living benefit for you. In this case, the death benefit is the primary function of the policy, but the rider gives you options just in case.

Another difference between the two is the policy premium payment structure. With riders, you pay monthly or annually, along with your permanent life insurance premiums. For an asset based LTC policy, you typically pay in one lump sum, although payment options may be available depending upon your insurer.

What’s the difference between asset based LTC and long term care insurance?

Asset based long term care guarantees someone will get a pay out. Either you can use it while you’re living to cover nursing costs or your beneficiary can use the death benefit after you’re gone. With standard long term care insurance, it’s more of a “use it or lose it” scenario; if you don’t end up needing long-term care, there’s no payout.

Another difference between the two is how the policy premium payments are structured. With asset based LTC, you typically pay one lump sum, a one-time payment for your policy. (Some insurers will allow payments in installments.) With most LTC insurance, premiums are due annually or monthly. Although premiums for traditional long term care insurance policies are typically less expensive than an asset based LTC structure, you don’t see as many benefits. It often boils down to a case of getting what you pay for.

Benefits of asset based long term care

In addition to a guaranteed payout, either to you or your beneficiary, asset based long term care has a number of benefits not found with traditional LTC insurance:

Tax benefits

Whether you use your asset based LTC policy to fund care or pass it on to your heirs, money used from your insurance policy is typically distributed tax-free. 

Grows Over Time

The value you have available to use or pass on to heirs accumulates the longer you own an asset based LTC policy. Because permanent life insurance products, like whole life insurance, are used, your policy earns cash value at a guaranteed rate plus potential dividends.

Flexibility 

If you find you don’t need long term care later in life but don’t have beneficiaries or decide you’d rather have the cash value of your policy to spend on something else, it’s possible to cancel your asset based long term care and have the cash value returned to you. (Note that this is usually a taxable event.)

Who needs asset based long term care?

With rising healthcare costs and most long-term care like nursing homes, hospice and in-home care not covered by health insurance, a better question might be, “Who doesn’t need asset based long term care?” 

Given the flexibility of such a policy, plus tax benefits and guaranteed payout, it can be one of the best insurance products available for you and your family. Often, adult children are tasked with being caregivers for aging parents, which comes at a great cost to your heirs. Whether they are funding your long term care needs out-of-pocket, reducing working hours to provide care, or simply receiving less in terms of inheritance because you need to cash out assets to pay for care that otherwise would have been bequeathed to family members, not having a long term care strategy can be an expensive gamble.

Consider your own family history. If your parents or your spouse’s parents needed nursing care later in life or had debilitating medical conditions that may be hereditary, a long term care strategy is a must.

How much does it cost?

The cost of asset based long term care varies and depends upon your insurer, your health at time of application, and how much coverage you’re looking for. When long term care is paid out from an asset based LTC policy, it’s usually done on a monthly basis. So you’ll need to consider what kind of monthly payout would be sufficient. 

According to seniorliving.org the average monthly cost of nursing home care is $8,365. This varies by state (Alaska is over $27,000/month). In-home care is less expensive. For an asset-based long-term care policy that pays out $8,000+ dollars a month, a premium of $100,000+ may be a reasonable assumption.

There are a variety of ways to fund an asset based long term care policy. This may include existing cash value whole life insurance policies, annuities—using a 1035 exchange, your retirement account or qualified retirement plan (401(k), IRA, Roth IRA), an HSA (health savings account), home equity, your savings, or other sources of income. 

When should I get asset based long term care?

Most people think about long term care as they approach their retirement years, in their 60s and 70s, but considering it earlier, say in your 40s or 50s, could be more beneficial. Because your asset based LTC policy earns cash value over time, the sooner you get asset based LTC, the more cash value it will accumulate. 

Wealth Strategist Gary Pinkerton makes a good case for why asset based LTC might be something for you to consider sooner, rather than later:

Case study: Gary Pinkerton

My wife and I just purchased an asset based long term care (LTC) policy.  Sue is 46 years old and I am 48 years old. Why would we do this, likely, 30 years before we will use it? To protect the legacy we intend to pass on to family and valued charities, and in recognition of a personal experience that taught me ‘insurability’ is completely unpredictable. In 1990, I was in my third year at the US Naval Academy and my mother informed me she had been diagnosed with Parkinson’s disease. She was 51 years old and otherwise very active and in good health. Her symptoms for the first five years were relatively minor and controlled well by medications, followed by 10 years of relatively good mobility in an assisted living facility and the final decade in a full care nursing facility with no mobility.

Extended LTC events destroy family wealth. It is probably not a surprise to anyone when I state that getting varying levels of assistance in performing her activities of daily living (ADLs) during her 26 years of struggling with this disease, wiped out every penny she had. Thankfully, events of this severity are still not that common, but it is important to recognize diagnoses of Parkinson’s and Alzheimer’s disease which have an average need for care over 8 years, and LTC needs in general are all on the rise. One in five people today require care for five years or longer, and fully 70% of Americans turning 65 today will need LTC in their lifetime.

Like most aging grandparents, my mother had plans to give her unused savings to her grandchildren, and to her church. But that option was removed at age 51 when her diagnosis caused her to become ineligible for LTC insurance, even with virtually no symptoms for the next few years. Like my mother and I’m sure most of you reading this, my wife and I have big plans for enjoying the wealth we worked hard to grow and then giving it to those most dear to us—a legacy to our family and to those service organizations that we believe are making the world a better place. So we bought LTC insurance in our 40s, the only policy that can guarantee our plans will come true.

What is asset based LTC and why is it different? First, let’s review the more common version of LTC coverage, ‘health insurance based’ plans. These plans popularized by Genworth and Prudential over the last 30 years are referred to in this manner because like health insurance (or car insurance) you pay each year for the option to use LTC if it is needed, a system referred to as ‘use it or lose it.’ 

Starting that type of plan in our 40s with no expectation to use it until our 70s barring one of these catastrophic diagnoses would be very expensive and wasteful. Other disadvantages of these plans are that they come with a catastrophic cap to prevent their use for more than 4-5 years (defeating the specific purpose we bought ours), and they come without a guarantee against increasing premiums. Since retirees have had premiums increased on active policies several times recently, they have nothing to show for years they’ve paid premiums and not needed the benefits, and they are bound by a cap on the number of years they can receive the benefits, most Americans have no LTC insurance; like my mother, they remain completely exposed with no plan whatsoever.

Our asset based LTC policy is vastly different. We purchased a cash value whole life insurance policy that can be used entirely for LTC expenses if needed with any remainder going to family as a death benefit. The premiums of our policy are guaranteed not to go up, and the benefits are guaranteed to continue for the rest of both of our lives and will even rise to keep up with inflation starting today. It is truly a good feeling knowing we’ve completely removed the concern from our future that worries a majority of retirees today, that of LTC expenses destroying their assets in retirement. 

What the underwriting process?

Underwriting for an asset based long term care policy is fundamentally the same as underwriting for other permanent insurance products. Approval is based on insurability, which is largely determined by your current health. This is another reason why you should consider an asset-based LTC plan now; no one knows how their health will change down the road, so it makes financial sense to lock in the lowest premium possible. 

There are a number of insurance companies who offer asset based LTC products. At Paradigm Life, you can work with expert Wealth Strategist who help pair you with the right product for your budget and financial goals. Consultations are always free.

Your Wealth Strategist can provide you with illustrations from various insurance companies so you can see what your options are when it comes to long-term care. Once you’ve decided on a policy, they’ll help you through the underwriting process, providing you all the forms you’ll need. The customer care team at Paradigm Life can even set up an in-home medical exam, should your insurer require one (most do). 

Once your exam and paperwork are complete, it typically takes about 30 days for your insurance application to be processed. Once you’ve been approved, you’ll pay your premium (either one lump sum or in payments, depending upon your insurer) and you’ll automatically be covered. 

If you’re looking for a better way to protect your wealth and avoid placing a financial burden on your loved ones, an asset based long term care policy could be the right strategy for your goals. Schedule a free consultation with a Wealth Strategist to further explore your options today.