What IS Asset-Based Long-Term Care?

As you plan your retirement future, consider your options for long-term care. In-home or nursing home care can be expensive. But certain financial products can help. Asset-based long-term care insurance combines long-term coverage with life insurance. While a financial advisor can help you devise a plan for long-term asset-based care, here’s how it works.

When you purchase asset-based long-term care insurance, you’re buying is either permanent life insurance or an annuity. The latter is also an insurance contract. A permanent insurance policy is whole life insurance. It covers you until your death as long as premiums are paid. Whole life insurance can accumulate cash value over time. The money you pay in premiums earns interest.

With an annuity, you pay premiums that the annuity pays back to you when you need long-term care. Asset-based long-term care coverage through a whole life insurance policy and annuities are both living benefits. They pay out during your lifetime. This type of insurance usually requires an upfront premium payment. However, that’s the only premium you’ll pay. Depending on the insurer, you may have the option to pay premiums monthly. That’s similar to traditional long-term care insurance, which allows lump-sum or monthly payments. Once you need long-term care, your asset-based coverage pay out. You can fund the plan with a variety of different assets. For example, you can use money from savings or a retirement account. You also may use home equity, an existing whole life insurance policy or an annuity. The latter offer some flexibility when tapping into your assets.

"Living Benefits" versus "Long-Term Care" Insurance

Asset-based long-term care insurance combines either a permanent life insurance policy (such as whole life insurance) or an annuity with long-term care benefits. Whole life insurance provides lifelong coverage, builds cash value over time, and earns interest on the premiums you pay. An annuity, on the other hand, is an insurance contract where you pay premiums upfront, and the funds are distributed to you when long-term care is needed.

Both options include "living benefits" which allow you to access the policy’s value during your lifetime to pay for qualified long-term care expenses. For example, with a whole life policy, you can use a portion of the death benefit while you’re alive to cover care costs. Similarly, with an annuity, the funds you’ve accumulated can be paid out as needed for care. These living benefits provide financial flexibility, helping you address care needs without having to deplete other assets.

Typically, asset-based long-term care insurance requires a one-time upfront premium, but some insurers offer monthly payment options, similar to traditional long-term care insurance. You can fund these policies using a range of financial assets, such as savings, retirement accounts, home equity, or even by converting an existing life insurance policy or annuity. This versatility makes it a practical solution for managing future care expenses while maximizing the value of your assets.

How Long-Term Care Insurance Works

Asset-based long-term care insurance combines either a permanent life insurance policy, such as whole life insurance, or an annuity with long-term care benefits. Whole life insurance provides lifelong coverage as long as premiums are paid, builds cash value over time, and earns interest on the premiums you pay.

With an annuity, you pay a lump sum or periodic premiums, and the annuity pays out funds when you need long-term care. Both options offer 'living benefits,' meaning they allow you to access the policy’s value during your lifetime to cover qualified long-term care expenses.

This type of insurance typically requires a one-time upfront premium, though some insurers may offer the option to pay premiums monthly, similar to traditional long-term care insurance. Once long-term care is needed, the policy or annuity pays out benefits, helping you cover expenses without depleting other financial resources.

You can fund asset-based long-term care insurance using various sources, such as savings, retirement accounts, home equity, or by converting an existing life insurance policy or annuity. This flexibility enables you to leverage your assets effectively while securing protection for future care needs.

What if you don't need Long-Term Care?

It’s possible that you may never need long-term care, which is where asset-based long-term care insurance truly stands out. If you don’t use the long-term care benefits, the policy ensures your premiums aren’t wasted. In the case of a life insurance-based policy, the death benefit will pass to your heirs tax-free. This provides a dual advantage: you have peace of mind knowing long-term care is covered if needed, and your family receives a guaranteed financial legacy if it’s not. This feature can be especially valuable in estate planning, helping you preserve wealth and pass it on efficiently.

For example, the tax-free death benefit could help your heirs pay off debts, cover estate taxes, or fund their personal goals, such as education or homeownership. This allows the policy to serve a dual purpose: protecting your own future while leaving a meaningful inheritance for your loved ones.

Additionally, many asset-based policies offer flexibility if your circumstances change. Depending on the terms, you may be able to cash out and surrender your coverage. This could allow you to reinvest the funds or purchase a traditional long-term care insurance policy instead. However, be aware of potential surrender charges, which are often a percentage of the policy’s value and can be significant if your coverage amount is substantial. Before making this decision, it’s essential to carefully weigh the financial impact of these fees against your goals and the potential benefits to your heirs.

Pros & Cons of Long-Term Care Insurance

On the upside, the policy guarantees a payout. It may be long-term care benefits paid to you, or a death benefit paid to your beneficiary. As long as the money from an asset-based long-term care plan goes toward long-term care expenses, the benefits pay out tax-free. The money that you pay into the plan grows with interest. So, if you decide to surrender it, you’ll get a return on what you paid in for premiums. And having this kind of coverage in place can help you avoid having to drain your retirement assets in order to qualify for Medicaid if you have no other way to pay for long-term care. However, it’s important to consider both the cost and the benefit amounts you can receive with asset-based long-term care coverage. Long-term care insurance products tend to be more expensive than traditional life insurance so that’s something to consider. You should also be aware of how much the plan will pay out if you need to use your long-term care benefits. Typically, these plans cap the benefits paid for long-term care. If your care costs exceed the benefit amount, that may leave a funding gap that you’ll have to make up.

The Bottom Line

Asset-based long-term care insurance offers a well-rounded solution to one of life’s biggest uncertainties: the potential need for long-term care. It can alleviate the financial burden that comes with paying for nursing care, in-home care, or other extended services, giving you and your family the confidence that your future needs are accounted for. Unlike traditional long-term care insurance, which only pays out if you require care, asset-based policies ensure your premiums are never wasted. If you don’t need care, the policy’s death benefit allows you to leave a meaningful financial legacy for your loved ones, offering them ongoing stability and security after you’re gone.

Beyond financial protection, this type of insurance provides peace of mind. It reassures your family that they won’t have to bear the emotional and financial strain of making care decisions under pressure. By planning ahead, you’re not only safeguarding your own quality of life but also protecting your family from difficult choices and expenses down the road.

If you’d like to learn more about how asset-based long-term care insurance can fit into your financial plan, Wyatt Financial & Insurance Solutions is here to help. Contact us via phone or email today for a free consultation. Our knowledgeable team can walk you through your options and help you create a personalized strategy to secure your future and protect your family.