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Buying long-term care insurance is one way to plan financially for a time when you might need to pay for help to take care of yourself. But it is expensive, hard to qualify for, and buyers are wary about shelling out a lot of money for coverage they may never use. Plus there is no guarantee that your annual policy price won’t increase in the future. In the past decade, many long-term care insurance policyholders have been hit with big price hikes.
Before you buy a policy, it’s a good idea to explore alternatives. Here are just some of the alternatives to buying a long-term care insurance policy.
Buy a short-term care insurance policy
Short-term care insurance covers the same types of care as long-term care policies, but for a shorter period of time — three months to 360 days. You choose the period when you buy. Generally, short-term care insurance has no “elimination period,” or waiting period, so the policy starts paying out as soon as you start using care. The elimination period on a long-term care policy works like a deductible: It’s the number of days you pay for care before the policy pays out. A typical elimination period is 90 days.
Pro: A short-term care insurance policy costs less than a long-term care policy and is easier to qualify for. Although the coverage lasts less than a year, that might be all you need. You can also buy a short-term care insurance policy to pay for care during the elimination period of a long-term care insurance policy.
Con: A short-term care insurance policy won’t provide enough coverage if you need care for more than a year. It might make more sense to save money for several months of care than to pay year after year for a short-term care policy. In addition, states don’t regulate short-term care policies as tightly as they regulate long-term care policies, so they’re not held to the same consumer protection standards. That means you need to be extra careful when buying. For example, long-term care policies must be “guaranteed renewable,” which means the policy renews year after year as long as you continue to pay for it. Many short-term care policies are guaranteed renewable, but they’re not required to offer that protection. In a review of policies on the market, consumer advocates found at least one that did not guarantee renewal. Under that policy, the insurer could refuse to renew coverage, even after you’d paid years for it and had never made a claim.
Tap into ‘living benefits’ on a life insurance policy
This feature is sometimes called “accelerated death benefits” and is available on most permanent life insurance policies such as whole life insurance. It lets you take a portion of the life insurance payout while you’re still alive to pay for medical expenses, including long-term care. The death benefit is reduced by the amount used for long-term care.
Pro: The cost is included in your rates on some life insurance policies, and you can add it for a small cost on others when you buy.
Con: The triggers for when you can access the benefits for care vary by company, so read the fine print carefully. A trigger could be diagnosis of a terminal illness. Also, using the policy for long-term care reduces the payout your beneficiaries will get.
Use an annuity
You can buy an immediate annuity to provide a steady stream of income to pay for long-term care. With an immediate annuity, you pay a one-time lump sum and the insurer provides a guaranteed stream of income for a certain period or the rest of your life. The amount you receive depends on how much you paid in and your age, health and gender.
Pro: You can buy an immediate annuity even if you’re in poor health. In fact, you can qualify for a higher annual payout from the annuity if you’re in poor health than if you’re in good health.
Con: You need a large sum of cash to invest, such as $100,000 or more. The income from the annuity still might not be enough to pay for your care. The tax implications for annuities are complex, so you’ll want to talk with a tax advisor to understand the future tax bills.
Buy a combination long-term care/life insurance policy
These policies, also called asset-based or hybrid life insurance and long-term care insurance policies, provide a pot of money for long-term care if you need it or a death benefit to your beneficiary if you don’t max out the long-term care benefits. Typically you pay one large premium upfront, such as $100,000, or a few large payments over a few years. Under some policies, you can get your money back if you decide years later you don’t want the policy.
Pro: You get something for your money even if you never use the long-term care portion of the policy. If you don’t use it for long-term care, or don’t use all of it, your beneficiary gets a life insurance payout when you die.
Con: It’s an option only if you have a large sum of money to spend.
These long-term care insurance alternatives are worthwhile considerations, but sometimes keeping things simple is better. The key is to take your time, do your homework and pick an option that makes the most sense given your situation. Always consult with a professional if these options seem too complicated to decipher.