What Is Asset-Based Long-Term Care?

The cost of long-term care can quickly erode a lifetime of savings, yet many people hesitate to buy traditional long-term care insurance because they worry they’ll never use it. Asset-based long-term care insurance offers a different approach by combining long-term care benefits with life insurance or an annuity, allowing policyholders to preserve value even if they never need extended care. Understanding how these policies work can help you decide whether they belong in your retirement and estate planning strategy.

If you need help planning for long-term care, consider speaking with a financial advisor.

Asset-Based Long-Term Care Definition

Asset-based long-term care is a type of insurance that combines long-term care coverage with a life insurance policy or, less commonly, an annuity. Unlike traditional long-term care insurance, which only pays benefits if you need qualifying long-term care services, an asset-based policy is designed to provide value regardless of whether you ultimately require care.

Most asset-based long-term care policies are funded with either a single lump-sum payment or a series of fixed premium payments over a set period. If the policyholder needs assistance with activities of daily living or experiences cognitive impairment that meets the policy’s eligibility requirements, the policy can provide tax-advantaged benefits to help cover expenses such as nursing home care, assisted living or in-home care.

If long-term care benefits are never used, the policy’s life insurance death benefit is generally paid to beneficiaries when the insured dies. Some policies also include a cash value component that may allow the policyholder to access funds or surrender the policy, although doing so could reduce available benefits or result in fees.

Because these policies combine insurance protection with a financial asset, they are often marketed to individuals who want to avoid the “use it or lose it” nature of traditional long-term care insurance. However, they typically require a larger upfront financial commitment and may cost more than standalone long-term care coverage, making it important to evaluate how the policy fits within an overall retirement and estate planning strategy.

How Asset-Based Long-Term Care Insurance Works

Asset-based long-term care insurance is built on either a permanent life insurance policy or an annuity.

When you purchase asset-based long-term care insurance, you’re buying either permanent life insurance oran 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 pays 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.

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What If You Don’t Need Long-Term Care?

It’s possible that you may never need long-term care. That’s where an asset-based insurance policy can pay off. If you don’t use long-term care benefits, the policy passes to heirs tax-free at the time of your death. Either way, you’re guaranteed to get value for your premiums.

Depending on how the policy is structured, you may also cash out and surrender your coverage. You might do this if you don’t anticipate needing long-term care coverage. You can invest the money elsewhere, or purchase a traditional long-term care insurance policy instead.

However, cashing out an asset-based long-term care plan may trigger a surrender charge. This surrender charge is typically a percentage of the policy’s value so if you have a significant amount of coverage, the surrender fee could be on the steep side.

Pros and Cons of Asset-Based LTC

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. However, it’s important to consider both the cost and the benefit amounts you can receive with asset-based long-term care coverage.

Advantages

Dual purpose: Asset-based LTC policies combine long-term care benefits with life insurance or annuities, ensuring funds are utilized either for care or as a death benefit for beneficiaries. This eliminates the “use it or lose it” concern associated with traditional LTC insurance.
Flexibility: These policies often allow policyholders to access cash value or withdraw funds if long-term care isn’t needed, offering more control over their financial resources.
Simplified underwriting: Asset-based LTC policies may have less stringent health requirements compared to traditional long-term care insurance, making them accessible for those with pre-existing conditions.
Tax advantages: Long-term care benefits from these policies are often tax-free and premiums paid with after-tax dollars may qualify for tax deductions under certain circumstances.

Disadvantages

High upfront costs: Many asset-based LTC policies require substantial initial payments, which can be a barrier for those with limited liquid assets.
Reduced liquidity: While flexible, committing significant funds to these policies can limit their availability for other financial needs or emergencies.
Complexity: Understanding the terms and mechanics of hybrid policies may be challenging, requiring thorough research or professional advice.
Limited growth potential: Compared to standalone investments, the cash value within asset-based LTC policies typically grows at a slower rate, which may not suit those seeking higher returns.

Who Asset-Based Long-Term Care Is Best Suited For

Asset-based long-term care may appeal to individuals who have accumulated savings and want those assets to serve more than one purpose. Instead of setting aside money solely for potential care expenses, these policies allow funds to support either long-term care needs or a future death benefit.

People who are concerned about paying premiums for traditional long-term care insurance and never using the benefits may find asset-based coverage more attractive. The dual-purpose structure addresses the “use it or lose it” concern by providing value even if care is never needed.

This type of coverage can also suit individuals who have moderate to good health but may not qualify for traditional long-term care insurance or prefer simplified underwriting. Some asset-based policies have more flexible health requirements compared to standalone LTC policies.

Asset-based LTC may be a fit for households focused on legacy planning. Because unused benefits can pass to beneficiaries as a death benefit, the policy can align with goals of preserving wealth while still preparing for potential care costs.

On the other hand, asset-based LTC may be less suitable for those with limited liquid assets or tight cash flow, since policies often require large upfront premiums. Evaluating available resources and overall financial priorities can help determine whether this approach aligns with your situation.

Bottom Line

Asset-based long-term care can cover nursing costs while preserving assets for your loved ones.

Asset-based long-term care can help cover the cost of nursing care while still leaving a death benefit for your loved ones. For many people, it offers a way to plan for care needs without depleting the assets they hope to pass on.

“It’s best to discuss your long-term care funding needs with a fee-only financial planner. These professionals don’t accept payment for recommending certain products, so you can be sure you’re getting guidance that puts your interests first,” said Tanza Loudenback, CFP®.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Long-Term Care Planning Tips

Consider talking to a financial advisor about asset-based long-term-care and other ways to pay for the care you may need. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call 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.
While researching asset-based long-term care, consider other options. For example, those might include a long-term care annuity. Also, you may consider a life insurance policy with a long-term care rider or short-term care insurance. Compare the cost and benefits of each one. That can help you narrow down which one may be the best fit for your needs and budget.