Asset-Based Long-Term Care: What Is It?

By Mike Obel | AUG 30, 2023

Considering your options for long-term care is an important part of planning for retirement and your financial future. In-home nurses and round-the-clock care are among the most expensive long-term care services, and nursing homes can also eat up a significant chunk of your life savings. However, asset-based long-term care, which combines aspects of long-term care insurance and life insurance, can help you cover many of these expenses. A financial advisor can also help you decide whether asset-based long-term care is a good option for your healthcare needs in retirement.

What Is Asset-Based Long-Term Care?

Asset-based long-term care is a type of permanent life insurance policy or annuity that allows policyholders to use the death benefit associated with their current life insurance policy as leverage to pay for long-term care costs, like a nursing home or in-home care. Of course, the specific type of long-term care you’ll have access to through your asset-based long-term care policy will vary from contract to contract.

It’s important to note that asset-based long-term care is different from a life insurance policy with a long-term care rider. With this arrangement, you add to your current life insurance policy so that you can cover long-term care and have death benefits pay out to your beneficiaries. On the flip side, asset-based long-term care will instead use your one death benefit to pay for long-term care expenses.

How Does Asset-Based Long-Term Care Work?

Asset-based long-term care policies involve cutting directly into the death benefit of your life insurance policy. This means that the policy allows you to preemptively use the death benefit of your life insurance policy to pay for long-term care expenses. With a normal life insurance policy, the company will only pay out a death benefit to your beneficiaries when you die, which is  non-negotiable.

If you end up needing significant long-term care for a lengthy period of time, you could end up using most of your death benefit. This unfortunately leaves your beneficiaries without a significant payout when you’re gone. However, if you’re purchasing asset-based long-term care life insurance with the preconceived notion that it’ll go towards your care, this might not be a huge factor. But if you don’t end up needing long-term care at all or for very long, your death benefit will remain largely untouched.

Asset-Based Long-Term Care: Benefits and Drawbacks

One major perk of asset-based long-term care is that it provides flexible payouts. These policies also guarantee that your long-term care needs will be covered up to a certain point, which is a huge stress reliever.

Beyond the above, the benefits of your contract will accrue interest before paying out. They’ll also pay out tax-free when used for long-term care expenses, which is a great benefit. Plus, if you don’t end up needing very much long-term care, your death benefit can still go to your beneficiaries.

On the other hand, asset-based long-term care can be quite expensive. If the asset-based long-term care policies you’re looking at are pricey, it might be worth seeing if adding a long-term care rider to a traditional life insurance policy makes more sense. You should also note that if you need more long-term care than can be covered by your policy, you may be on the hook for what it doesn’t cover.

Again, remember that using the benefits of your asset-based long-term care will eat into your policy’s death benefit. This could be a relatively minor drawback if you don’t end up needing much long-term care. But if your concern is what your family receives when you’re gone, asset-based long-term care may not be a great choice for you.

Should You Get Asset-Based Long-Term Care Insurance?

Ultimately, the decision to get asset-based long-term care rests on your shoulders. You should make sure to adequately review your financial situation, tolerance for risk, time horizon and anticipated future needs before making any final decisions. It can also be smart to bring in your family members to help you decide.

If you anticipate needing a lot of expensive long-term care, you may want to investigate different options. You may have to combine a few sources in order to reach your goals in this case. Even still, asset-based long-term care is a good alternate option if you’re thinking about adding a long-term care rider to your existing insurance policy.

Bottom Line

Asset-based long-term care insurance policies can help you afford long-term care in a variety of situations. Since you’re using your life insurance death benefit as leverage to pay for long-term care expenses, you can use as little or as much of it as you want. Just keep in mind that the more you spend on long-term care, the less you’ll have available as a death benefit payout to your beneficiaries. As is the case with any insurance policy, make sure you’re familiar with the fine print before deciding if a policy is right for you.

Tips for Retirement

• A financial advisor can help you create a financial plan for your retirement needs and goals. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you.If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you decide to plan for your retirement by yourself, it’s a good idea to be prepared and knowledgeable. SmartAsset has you covered with a variety of free online resources that can help you make good retirement decisions. Check out our free retirement calculator today.

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