What is Asset Based Long Term Care?
Asset-based long-term care is a life insurance policy that provides a form of coverage for elderly and disabled individuals who require assistance with activities of daily living. Normally, life insurance pays a death benefit to the beneficiary when the policyholder dies. With an asset-based long-term care policy, however, the death benefit is converted into a pool of money that can be used to pay for care and other purposes such as education or retirement savings. There are three main elements that contribute to the overall cost of long-term care: housing, health care, and personal assistance services. An asset-based policy helps to cover the costs of all three.
Why Do People Need Long-Term Care?
Most people need long-term care because they are unable to perform activities of daily living, such as bathing, dressing, and eating. Others may need long-term care because they are unable to perform certain tasks associated with their primary residences, such as cooking or cleaning. Because most individuals are not financially prepared for the costs of long-term care, many rely on Medicaid, which is a federal program that provides benefits for low-income people with limited resources. However, Medicaid does not always cover certain services and facilities, such as assisted living and nursing homes. This is where an asset-based long-term care policy can be helpful. It can provide a safety net for those who need it, while still allowing the individual to retain some of their assets.
Who Can Benefit from Asset-Based LTC?
Some of the people who are likely to benefit most from asset-based long-term care policies are those whose health insurance does not cover all expenses related to long-term care. If an individual is forced to rely on Medicaid or other publicly funded programs due to a lack of alternative coverage, this could result in a significant loss of income and assets. An asset-based long-term care policy can help to prevent this from happening. Individuals who would like to have long-term care coverage but are unable to purchase it because of preexisting conditions may also benefit. Asset-based LTC policies are generally available regardless of medical history or health, and they can help to provide peace of mind and security.
How Does Asset-Based LTC Work?
When an individual purchases an asset-based long-term care policy, they are essentially buying a life insurance policy that will provide a death benefit. However, instead of the death benefit being paid out to the beneficiary, it is used to pay for long-term care services. The amount of coverage an individual receives will depend on the amount of money they choose to use as the face value or death benefit for their policy. When an individual decides to apply for long-term care services, the insurer will segregate the assets in the policy and hold them until a claim is paid out. If there are more assets than needed to pay for long-term care, then the extra amount will be paid out as a death benefit to the beneficiary. If there are not enough assets in the policy, then the individual may have to claim Medicaid benefits to cover their expenses.
Asset-Based LTC Policy Cost
The cost of an asset-based long-term care policy varies depending on factors such as the type of insurance company offering it, the age of the person who has applied for coverage, and the amount of coverage being requested. Generally speaking, however, individuals can expect to pay higher premiums for more extensive benefits. Most policies are structured as whole life or universal life policies, meaning that they will accrue more value over time. For example, someone who purchases a $100,000 policy at age 55 could expect to pay about $2,000 per year for the first 10 years (and more after that). A 45-year-old individual with the same policy might pay about $3,000 per year. The younger the purchaser is when they purchase their policy, however, the lower the premiums will be for life.
Pros of Choosing Asset-Based LTC
There are several benefits to choosing an asset-based long-term care policy: – The policyholder retains control of their assets and does not have to rely on government assistance. – Coverage is available regardless of health history or condition. – Assets can be used to cover all types of long-term care, including assisted living, nursing homes, and home health care. -The policyholder can choose the amount of coverage they need. -Premiums are often tax-deductible.
Cons of Choosing Asset-Based LTC
There are also a few drawbacks to choosing an asset-based long-term care policy: – The policyholder may outlive the benefits of the policy. -The cost of premiums may increase over time. -If the policyholder needs to claim Medicaid benefits, they may be subject to spend-down requirements. -The policy may not be transferable to another person. -If the beneficiary is disagreeable with paying for long-term care costs, they may not be able to use the death benefit payout. -The policy may have a lower value than the cost of long-term care services.
Asset-based long-term care policies can be a wise financial decision for individuals who want to ensure that they have coverage for long-term care expenses. The policies can provide a death benefit that can be used to pay for services such as assisted living and nursing homes. They can also help to protect the individual’s personal assets from being used to pay for long-term care expenses. Individuals who are interested in purchasing an asset-based long-term care policy should consult with a financial advisor to find the best policy for their needs.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.