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Why, How & When Asset Based LTC is an Efficient Planning Tool

Asset Based Long Term Care Product Comparison Table

Insurer/ ProductType of Funds AcceptedPremium OptionsMinimumIssue Ages
Global Atlantic
ForeCare
Non-Qualified OnlySingle Premium$35,00050-80
Lincoln Financial
MoneyGuard II
Non-Qualified OnlyLump, 5 & 10-pay$50,00040-79
Nationwide
Care Matters
Non-Qualified OnlyLump, 5 &10-pay$60,000 40-75
Annuity Care II:Non Qualified OnlySingle Premium$20,000 59.5-80
Asset Care III:Qualified fundsSingle Premium$20,000 59.5-80
Asset Care IV:10, 20 & life-pay$50,00020-80
Annuity Care I & IINQ or Qualified
Single Premium$10,000 50-85
Securian
SecureCare
Non-Qualified OnlyLump, 5,7,10 & 15 Pay$50,00040-80

The below table provides a quick comparison of the asset-based long-term care products we’ll be discussing in this guide.

What is Asset Based Long Term Care?

Asset Based Long Term Care is a specific product issued by Insurance Companies that can provide long-term care benefits in the event you need care. They are alternatives to long-term care insurance.

However, if you never require care, your asset passes to the next generation and becomes part of your legacy to your beneficiaries. The marketplace has proved this is a welcomed change from the “use it or lose it” benefits provided by traditional long-term care.

When you purchase an Asset Based Long Term Care product you are essentially leveraging a portion of your assets to fund your long-term care insurance. In this way, the cost for the long-term care insurance you receive is the opportunity cost of what your asset could have earned had it been invested elsewhere.

Asset-based long-term care is available as a long-term care annuity as well as on a life insurance chassis.

What is Long-Term Care Insurance?

Long-term care is advanced and costly care that must be administered over a long period due to some type of debilitating illness. It is often referred to as (LTC) and traditional long-term care insurance is many times abbreviated as (LTCI).

Long Term Care doesn’t just mean the nursing home.   LTC needs may arise sooner than you think. Short-term access to long-term care can help you recover from a sudden illness or injury. For example, while recovering from hip surgery you may need rehabilitation therapy that requires several weeks or a few months at a nursing facility.

This risk is a source of anxiety for retirees, yet most are unwilling to accept the variable costs and potential loss of premiums paid under conventional health-based long-term care insurance products. And few have taken steps to understand the complete range of long-term care insurance product features and options available to them.

No one wants to think, “This could be me” and no one can predict the future. But, according to the U.S. Department of Health and Human Services (1):

    • Almost 70% of all individuals age 65 and older will need some type of long-term care services and support. The average cost of those services and support is $138,000.²
    • Women generally need care for longer periods than men. As a result, the average cost of long-term services and support for men is $91,100 and doubles ($182,200) for women.

There are more options than ever to help you maintain comfort and dignity during a care need, including receiving care in your own home. All types of quality Long Term Care are costly especially In-Home Health Care. 

Two Types of Asset Based Long Term Care

#1. Life Insurance Combined with LTC Benefits

Use existing assets to protect you and your loved ones from the expenses, and perhaps the emotional strain, that can arise when a family faces the need for long-term care.

  • Premium options — Use existing assets, such as a CD, savings, or IRA, as one-time-only premium payment, or choose guaranteed annual premiums that can never increase
  • Asset protection — Get the security of a life insurance policy that grows at a minimum, tax-deferred interest rate
  • Tax-free benefits — Pay no income tax if you use your life insurance for qualifying long-term care expenses — should you need it
  • Leave a legacy — If you never use the long-term care benefit or if you only use a portion of it, your named beneficiaries will receive the death benefit — income tax-free

Tax Advantages of Asset-Based LTC Life Insurance Policies

HIPAA stated that life insurance and LTC benefits could be combined in one policy. If the provisions for payment of LTC benefits comply with the law, those benefits will be received income tax-free. (6) Additionally, if the policy pays no LTC benefits and the policy pays its life insurance death benefit on the insured’s death, then that benefit will also be received free from income tax.

The typical configuration of a life insurance asset-based contract involves what is an acceleration of the life insurance policy’s death benefit for qualified LTC claims.

For example, a policy may provide that the maximum monthly LTC benefit is 2 percent of the policy’s death benefit. Hence, if the policy had a $250,000 death benefit, the maximum monthly LTC benefit would be $5,000 per month for 50 months. Each payment of LTC benefits would correspondingly reduce the policy death benefit. I

If the full payment of $5,000 were to be paid for 50 months, the policy death benefit would likewise be exhausted.

#2. Annuity with Long Term Care Rider

Have you saved and invested enough to live on during retirement? Then consider designating some of your provisions for end-of-life care or long-term care. You can transfer existing savings or other assets to a long term care annuity that combines long-term asset growth with long-term care benefits.

  • Single premium option — Use existing assets, such as a CD, savings, or another annuity, as one-time-only premium payments and avoid ongoing, non-guaranteed premium payments
  • Added value for care — Your accumulated value grows at a guaranteed minimum interest rate; when you withdraw money for long-term care expenses your funds get credited at an even higher interest rate
  • Tax-free benefits — Pay no income tax if you use your annuity for qualifying long-term care expenses, regardless of the deferred gain (subject to monthly maximums, and premiums funded after-tax)

Long Term Care Qualifying Expenses

Aging, accidents, illnesses, and chronic conditions may limit your ability to care for yourself. When this happens, you need access to quality care. You also may need assistance with everyday, personal tasks. Licensed long-term care providers and long-term care facilities can help with these and other types of “activities of daily living:”

HIPPA states that asset-based long-term care insurance benefits become available only when you are either confined to an assisted living or nursing home facility or when you are no longer able to complete 2 out of the 6 activities of daily living.¹ 3 Glass Jars filled with coins, one labeled savings, 2nd labeled vacation and the 3rd medical Asset Based Long Term Care Guide

Activities of Daily Living (ADLs)

  • Bathing
  • Continence
  • Dressing
  • Eating
  • Toileting
  • Transferring (moving in and out of bed)

There are other everyday tasks that you may need assistance with, including:

  • Housework
  • Managing money
  • Taking medication
  • Preparing and cleaning up after meals
  • Shopping for groceries or clothes
  • Using the telephone or other communication devices
  • Caring for pets
  • Responding to emergency alerts such as fire alarms
Older Retired Gentleman Pushing Great Grandson on the Swing

HIPPA Makes Asset Based Long Term Care Possible

The chaos in the traditional health-based long-term care insurance led many middle-income retirees to throw up their hands in frustration and decide to simply take their chances on not needing assistance in old age.

Understanding this frustration, Congress has passed laws that provide incentives for taxpayers to purchase LTC coverage but in a manner different from traditional, stand-alone, health-based LTCI. In 1996, with the:

Health Insurance Portability and Accountability Act (HIPAA)

    The federal government set forth the requirements for tax-qualified LTC policies. Until that time, the tax status of benefits paid under LTC policies was uncertain. HIPAA provides that, if the policy meets certain triggering events for payment of benefits, then the benefits paid will be received free of income tax.

These provisions are codified in:

Benefits of Asset Based Long Term Care

    1. If there is no LTC claims the insured’s beneficiaries receive the policy death benefit and receive income tax-free.
    2. Pricing Stability – It is fair to say that the mortality of the U.S. population has been one of the most studied of any in history and that the actuarial profession has the mortality risk of the general population pretty well figured out.
    3. Risks associated with Long Term Care Insurance, a relative newcomer, have proven difficult to accurately predict. Asset Based Long Term Care Products combine the uncertainty of LTC underwriting with the relatively stable assumptions used in life insurance.
    4. They permit the individual who is willing to partially self-insure his or her LTC risk the ability to do so and to do so in a manner that is generally more tax-efficient than with any other method of investment.
    5. Setting aside funds in an asset based long term care product using a life insurance chassis can free up other funds for you to use knowing your legacy objectives are protected from an end-of-life long-term health event.

At the time this article was written, there were 14 carriers that market some form of asset based long term care; either life insurance with LTC benefits or an annuity with LTC benefits, or both (8), and several more carriers are planning to enter the market. While specifics of the various policies may differ, the general methodology for most of them is based on the same concepts described above.

In a nation with an aging population and a volatile economy, and where end-of-life care and the cost
of that care is an ever-increasing concern, understanding the role that asset based LTC products can play in retirement income planning should be the cost of admission for a financial advisor.

Attorneys, accountants, and financial advisors who work with the elderly often encounter clients who are concerned and confused about LTC. A complete exploration of assets and a thorough knowledge of the options available are required if the advisor is to provide competent advice. 

Sources:

(1) Health Insurance Portability and Accountability Act, Public Law 104-191, Sec. 321(a) (1996). Added IRC Sec. 7702B, which governs the requirements for tax-qualified LTC contracts. IRC Sec. 7702B(c) provides that benefits must be triggered if two activities of daily living (ADLs) are unable to be performed. ADLs are eating, toileting, transferring, bathing, dressing, and continence. An additional trigger is defined as a condition “requiring supervision to protect such individual from threats to health and safety due to severe cognitive impairment.”

2. https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html, Last modified: 10/10/2017

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