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As people live longer and health care costs continue to rise, the need for long-term care (LTC) insurance has become increasingly important in retirement planning. This insurance has evolved significantly in the past decade. Before 2010, LTC policies were largely traditional, with a “use-it-or-lose-it” approach. Today, new product structures such as asset-based solutions and return-of-premium policies are available, offering flexibility, financial protection and even opportunities to fund long-term care with qualified retirement funds. So, what does this mean for your retirement plan?

How LTC insurance has changed

Historically, long-term care insurance policies were structured similarly to traditional health insurance. These pre-2010 policies typically required ongoing premium payments and provided coverage only if the policyholder needed care. If the policy was never used, the premiums paid were not recoverable, making it a less appealing option for many people. This “use-it-or-lose-it” structure was also vulnerable to premium increases and, in some cases, left policyholders with difficult choices about maintaining coverage as they aged.

In recent years, LTC insurance has transformed into a more flexible and appealing option for retirees. Companies like One America and Nationwide have developed asset-based LTC solutions, such as One America’s Asset Care and Nationwide’s CareMatters, that allow retirees to purchase LTC coverage within a life insurance policy or annuity. These hybrid policies provide access to long-term care benefits if needed but also offer a return-of-premium feature or a death benefit if long-term care is not required. This makes it possible for retirees to preserve some of their investment.

Additionally, premiums for these policies are typically fixed, which helps retirees avoid the cost uncertainty of older LTC policies.

The Asset Care solution from One America even allows for long-term care insurance funding with qualified retirement accounts, including IRAs. This can be a powerful tool for retirees who want to leverage their retirement funds for future care needs, reducing the impact on other savings or cash flow.

Self-funding vs buying coverage

One of the first considerations retirees face is whether to self-fund long-term care costs or buy coverage. Self-funding, or paying for care out of pocket, allows retirees to maintain control over their money without paying ongoing premiums. This approach may work for those with significant assets who believe they can absorb the potential costs of long-term care without compromising their standard of living.

However, the risk of self-funding is that long-term care costs can be unpredictable and steep. According to Genworth’s Cost of Care Survey, the median cost for a private room in a nursing home is $116,800. That’s a 5% increase from 2022, and the cost is expected to continue to rise. The need for long-term care can also last for several years, potentially creating a significant financial burden, especially if both spouses require care at different points in their lives. Without LTC insurance, the cost of care could erode retirement savings, reduce inheritance for heirs and affect the lifestyle of the healthy spouse.

Buying LTC insurance mitigates these risks by providing a pre-established pool of funds for care. While premiums are required, modern policies offer more options, such as return-of-premium or death benefits. These options ensure retirees get some value from the coverage even if they never need long-term care. Additionally, LTC insurance allows retirees to safeguard their assets and retirement income from the high and potentially prolonged costs of care. For those with family and legacy goals, this protection can be invaluable, allowing retirees to pass assets on to loved ones without the risk of long-term care expenses depleting their estate.

Control and choice in care

Another advantage of LTC insurance is the level of control it offers over care options. Those with LTC insurance have a broader choice of care settings, including in-home care, assisted living facilities and nursing homes, without the immediate financial stress of paying for care. For retirees who value independence and would prefer to stay in their homes, LTC insurance can provide the financial resources to make that possible, often covering the cost of in-home care providers and necessary medical equipment.

Additionally, LTC insurance protects the financial lifestyle of the healthier spouse. When one spouse needs care, the cost can quickly consume retirement income or liquidate savings that both spouses depend on. By using LTC insurance to cover these costs, retirees can ensure that the healthier spouse continues to have access to income and savings, preserving their financial stability and lifestyle. This protection is particularly valuable for retirees who do not want to burden their spouses with the financial or caregiving responsibilities that can accompany long-term care needs.

Funding care with tax-deferred savings

The flexibility of modern LTC insurance solutions makes them a valuable addition to a well-rounded retirement plan. Asset-based policies give retirees options to repurpose their investments into products that provide both LTC benefits and a death benefit or return-of-premium feature. With the return-of-premium option, retirees who do not need care can receive a portion of the premiums paid either as a death benefit or through a return of the invested premium. This option ensures that money set aside for care doesn’t go unused.

Buying LTC insurance with qualified money, such as funds in an IRA or 401(k), allows retirees to allocate retirement savings toward long-term care protection, leveraging tax-deferred savings for future needs without withdrawing large sums from other accounts. For retirees who wish to preserve their independence, protect their spouse’s lifestyle and ensure that their assets are protected, modern LTC insurance solutions offer a flexible, cost-effective way to achieve these goals.

Integrating LTC insurance into retirement plans

Today’s long-term care insurance options are a far cry from the rigid, high-premium policies of the past. With asset-based solutions that offer return-of-premium benefits and the ability to use qualified funds, LTC insurance has become a versatile, cost-effective way to prepare for care needs. Retirees who buy coverage gain the dual benefits of protecting their assets and securing a level of control and choice over future care. Additionally, LTC insurance safeguards the lifestyle and financial stability of a healthier spouse, which can be essential for maintaining quality of life in retirement.

As retirees weigh the decision to self-fund or buy LTC insurance, it’s essential to consider the potential financial risks of care costs. With modern LTC insurance, retirees can now take a balanced approach that combines flexibility, asset protection and peace of mind for themselves and their loved ones.

(Derek Miser serves as chief managing member at Miser Wealth Partners, LLC, located in Knoxville, Tennessee, and Tellico Village, Tennessee.)

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