Adding a long-term care insurance policy is, to a large extent, a way to plan financially for a time when you may need to pay for help caring for yourself. But it is not the only way to pay for home care, adult day care, assisted living, or a nursing home. Remember, however, that there are certain age restrictions. If you have already passed age 75, most long-term care insurance companies will not approve you for a policy.

That is why you should explore alternatives before purchasing a policy.

A Quick Review

Long-term care refers to services that help you with "activities of daily living," such as bathing, eating, and remembering to take medication. Regular health insurance and Medicare pay medical expenses, but they do not pay for custodial care, which is nonmedical assistance with routine activities. Medicaid, the federal and state health insurance program for low-income people, pays for nursing home care. However, you must have spent most of your money before qualifying.

An Essential Task

Planning is crucial in your 50s and early 60s because long-term care is expensive, and you are also looking after your own well-being. According to a 2020 report from the Administration for Community Living, part of the U.S. Department of Health and Human Services, more than half of people over 65 will need long-term care services. Among those who need long-term care, men will need services for an average of 2.2 years and women for an average of 3.7 years.

A long-term care insurance policy pays for care up to the policy limits if you have severe cognitive impairment, such as dementia, or cannot perform two of the six activities of daily living. These are:

• Bathing.
• Continence care.
• Dressing.
• Eating.
• Toileting, including getting on or off the toilet.
• Transferring, including getting into or out of a bed or chair.

Are There Alternatives?

Most policies sold today pay for care in a nursing home, assisted living facility, adult day care center, or at home. But some buyers are wary of spending a lot of money on coverage they may never use. And there is no guarantee that the annual price of your policy will not increase in the future. Over the past decade, many long-term care insurance policyholders have faced substantial price increases.

Here are alternatives to purchasing a long-term care insurance policy.

Save Money for Long-Term Care

If you have substantial savings, you could plan to pay for long-term care out of pocket.

• Potential advantage: You do not risk paying for insurance you may never use.
• Potential drawback: A few years of care could deplete your savings and leave you without money. In that case, you could apply for Medicaid coverage, which would pay for nursing home care. However, your choices would then be limited to facilities that accept Medicaid patients. And the program does not pay for assisted living in every state.

An Insurance Policy with 'Living Benefits'

Also known as an “accelerated death benefit,” this rider—or provision—is available with most permanent life insurance policies, such as whole life insurance. It lets you take a portion of the life insurance payout, or death benefit, while you are still alive to pay medical expenses, including long-term care. The death benefit is reduced by the amount you use to pay for long-term care.

• Potential advantage: The cost is included in the rates of some life insurance policies, while other policies allow you to add it for a small cost.
• Potential drawback: To access this feature of your policy, there are certain "triggers" at almost every insurer, so take the time to read the fine print. A trigger might be a terminal illness diagnosis.
  Another potential drawback for beneficiaries is that it reduces the payout they will receive from your life insurance.

Sell Your Life Insurance Policy

You can sell your permanent life insurance policy and use the proceeds for whatever you want, including long-term care expenses.

• Potential advantage: The proceeds from selling your policy—a transaction called a life settlement or viatical settlement—are generally greater than what you would receive by surrendering the policy for its cash value.
• Potential drawback: The proceeds may be taxable, and your survivors will no longer receive a death benefit from the policy. When you die, the death benefit goes to the policy's new owner.
  Another potential drawback is that it can be difficult to know whether you are getting a fair price.
  Life settlements are generally not available for term life insurance policies.

Annuities

To pay for long-term care, you can purchase an immediate annuity that would provide a steady income stream. When you purchase or invest in an immediate annuity, you pay a single lump sum, and the insurer provides a guaranteed stream of income beginning in the near future for a specified period or the rest of your life. The amount you receive depends on how much you paid, your age, sex, and other factors.

• Potential advantages: You can purchase an immediate annuity even if you have health problems.
• Potential drawbacks: You need a large amount of cash to invest, starting at $50,000 or more, and the annuity income still may not be enough to pay for your care.
  The tax implications of annuities are complex, so you will want to speak with a tax advisor—an accountant or financial professional—to understand future tax bills.

A Combined Life Insurance/Long-Term Care Policy

These policies, also commonly called “asset-based life insurance” or long-term care insurance policies, provide money for long-term care if you need it or a death benefit for your beneficiary. You generally pay a large upfront premium, such as $75,000, or several large payments over a few years.

• Potential advantages: You receive something for your money even if you never use the policy's long-term care portion. If you do not use it for long-term care, or do not use all of it, your beneficiary receives a life insurance payout when you die.
• Potential drawback: This is an option only if you have a large sum of money to spend.

Short-Term Care Insurance

Short-term care insurance covers the same types of care as long-term care policies, but for a shorter period: from three months to 360 days. You choose the period when you buy the policy. Generally, short-term care insurance has no "elimination period," or waiting period, so the policy begins paying as soon as you start using care. The elimination period in a long-term care policy works like a deductible: it is the number of days you pay for care before the policy pays. A typical elimination period is 90 days.

• Potential advantages: A short-term care insurance policy costs less than a long-term care policy and is easier to qualify for.
  The policy provides less than a year of coverage, which might be all you need.
  You can also purchase short-term care insurance to pay for care during a long-term care insurance policy's elimination period.
• Potential drawbacks: A short-term care insurance policy will not 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 do not regulate short-term care policies as strictly as long-term care policies, so they are not subject to the same consumer protection standards.
  This means you must be very careful when shopping. For example, long-term care policies must be “guaranteed renewable,” meaning the policy renews year after year as long as you continue paying for it. Many short-term care policies are guaranteed renewable, but they are 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,

Get Help Charting the Right Course

Financial planning for long-term care can be challenging for many people. Before purchasing any insurance, speak with a trusted financial advisor who can help you plan for long-term care expenses.

Remember that there are two types of financial advice: fee-only and commission-based. A fee-only advisor does not earn commissions from product sales and may help you see the big picture more objectively.