The question isn’t whether you can pay for care. It’s which dollars you want to use.

01The Funding Problem

According to the U.S. Department of Health and Human Services, someone turning 65 today has close to a 70% chance of needing some type of long-term care services. In the Philadelphia area, the cost of care can range from $43,000 a year for 24 hours a week of in-home care to $177,000 a year for a nursing home.

Source: Nationwide Cost of Care Map

Most people fund care in one of three ways:

1. 1.Medicaid, which generally requires spending down nearly all of your assets first.
2. 2.Traditional long-term care insurance, where premiums can rise over time and the money is gone if you never file a claim.
3. 3.Paying out of pocket, also called self-insuring.

For many households with meaningful savings, self-insuring sounds like the obvious answer. But it raises a harder question.

02“I’ll Just Self-Insure.” With Which Dollars?

If care is needed, the bill gets paid from something. Every bucket of money has a different true cost:

Self-insuring is a real plan. The question is whether you want care to come out of your most tax-expensive dollars, or out of a dedicated pool built for that purpose.

03What Is Asset-Based Long-Term Care?

Asset-based long-term care, often called hybrid long-term care, is a life insurance policy or annuity with long-term care benefits built in. You fund it with a lump sum or with payments over a set number of years, such as 10.

From there, one of three things happens:

• You need care. The policy pays a monthly benefit toward home care, assisted living, or nursing care.
• You never need care. Your beneficiaries receive a death benefit.
• Your plans change. Many designs offer a return-of-premium option if you want your money back should you cancel the policy

Unlike traditional long-term care insurance, it’s not “use it or lose it.” The money does something in every scenario.

04How It Works: You Cover the First Stretch, the Insurer Covers the Long Tail

Think of it as a hybrid between self-insuring and buying insurance.

Why this lowers the cost. Shorter care episodes are the most common, and the most manageable. The ones that drain a family’s finances are the long ones: years of memory care or round-the-clock support. Because the insurer isn’t paying for the first stretch, it can price the coverage for the catastrophic tail at a fraction of what full coverage would cost. You still transfer the largest part of the financial risk. It works much like a high deductible on a homeowners policy.

05What the Risk Actually Looks Like

OneAmerica, a mutual insurer that has offered asset-based long-term care since 1989, publishes data from its own claims. A few figures stand out.

Who files claims

• The average claimant is 84 years old. The youngest was 39, the oldest 103.
• About 57% of first claims begin between ages 80 and 89.
• 73% of claimants are women.

Why care starts

• 55%: cognitive conditions, including Alzheimer’s and other nervous-system conditions, dementia and other mental or behavioral conditions.
• 28%: physical conditions, such as musculoskeletal problems, stroke, and accidents or injuries
• 12%: illness, including heart disease and cancer

What this means for planning: most care begins in your 80s, and more than half the time it is driven by cognitive decline, the kind of need that tends to build over years rather than months. That long tail is exactly the risk worth insuring, and exactly the part an asset-based policy hands to the insurer.

Source: OneAmerica, “Exceptional Care Comes with Experience” (I-36337, 12/19/23). Claims data from 1989 through 12/31/2022. OneAmerica® is the marketing name for the companies of OneAmerica. Products are issued and underwritten by The State Life Insurance Company®, Indianapolis, IN.

06The Advantages

• Leverage. Because the insurer pools risk across many policyholders, each premium dollar can translate into several dollars of available care benefits.
• Tax-efficient benefits. Benefits from qualified long-term care coverage are generally received income-tax-free, within federal limits. Compare that with pulling the same care dollars from a pre-tax IRA.
• Your portfolio stays intact. A dedicated pool for care means you aren’t forced to sell investments at a bad time, or tap the assets you’d rather leave to family.
• Protection for a spouse. A care event for one spouse doesn’t have to drain the savings the other depends on.
• No wasted premiums. If you never need care, your beneficiaries receive a death benefit.
• Premium certainty. Many designs lock in your premium, so you aren’t exposed to the rate increases common with traditional coverage.

07The Real Cost: Lost Opportunity

No strategy is free, and the main cost here isn’t fees. It’s opportunity cost.

Every dollar placed in an asset-based policy is a dollar that isn’t invested in the market. Over 10, 20, or 30 years, money left in a diversified portfolio could grow substantially. An asset-based policy gives up some of that potential growth in exchange for certainty.

How that trade plays out depends on what happens:

• If you need extended care, the leverage typically puts you well ahead. The policy pays out far more than the same dollars would likely have grown to on their own.
• If you never need care, your heirs receive a death benefit that is generally more than you paid in, but it may be less than the same money could have grown to in the market.
• If you need cash along the way, early surrender values can be lower than what you paid in, so this money should be set aside for the long term.

Features matter too. Return-of-premium options and inflation protection add flexibility, but they reduce how much care each dollar buys.

The right question isn’t “Could this money earn more in the market?” It usually could. The question is whether a portion of your assets is better spent guaranteeing that a care event won’t force you to sell the rest at the wrong time, from the wrong tax bucket. Most clients set aside only a slice of their portfolio for this, and leave the rest invested for growth. We’ll show you both sides with real numbers before you decide.

08Annuity-Based Long-Term Care: When Health Is a Concern

Not everyone qualifies for the life insurance approach. A life-based policy requires underwriting for both mortality and long-term care risk, and a health history that rules you out for life insurance can rule you out here too.

Annuity-based long-term care is an alternative. It works on the same principle: you cover the first stretch, the insurer covers the long tail.

1. 1.You fund an annuity that has a long-term care benefit attached.
2. 2.Care costs are paid first from the annuity’s own value, the money you put in plus its growth.
3. 3.Once that value is used, the insurer keeps paying from a larger pool of benefits for an additional period, or for life, depending on the design.

Because the annuity’s own value covers the first stretch, underwriting is often simpler and more forgiving than for life-based coverage. That opens the door for many people who can’t get life insurance because of their health. Coverage still isn’t guaranteed, and each carrier sets its own health questions.

The leverage is generally more modest than with the life insurance approach. In exchange, you get broader access and an account value that stays yours. If you never need care, the remaining annuity value passes to your beneficiaries.

A Tax-Free Exit for an Annuity You Already Own

Many people own older deferred annuities with large untaxed gains. Withdraw that money, or leave it to heirs, and the gains are taxed as ordinary income.

Under the Pension Protection Act of 2006, an existing annuity can generally be moved into an annuity-based long-term care contract through a tax-free 1035 exchange (named for Section 1035 of the Internal Revenue Code). From there:

• Your cost basis and gains carry over without triggering tax at the time of the exchange.
• Money paid out for qualified long-term care expenses, including the gains, is generally received income-tax-free.
• The gains get a purpose. Growth you have deferred for years can become tax-free care dollars instead of a tax bill.

For someone holding an appreciated annuity they don’t need for income, this can turn a tax problem into a care plan. This approach generally applies to non-qualified annuities, those not held inside an IRA or retirement plan. Product availability varies by carrier and state.

09Using Qualified Money (IRA and 401(k) Dollars)

For many people, the largest pool of savings sits in an IRA, a 401(k), or a qualified annuity. With the life insurance approach, some carriers can put these qualified dollars to work through a staggered transfer:

1. 1.The qualified money moves into an annuity designed to pay out over a set period, typically 5 or 10 years.
2. 2.Each annual payout is applied as premium to a non-qualified, life-based long-term care policy.
3. 3.The tax is spread out. Only the amount paid out each year is taxable that year, like any IRA distribution, rather than the full balance at once.

The money moves now, and your coverage is built from day one, but the tax is structured over 5 or 10 years. Instead of cashing out an IRA and taking a large tax hit in one year, you redirect it in measured annual amounts into protection that pays tax-free benefits if care is ever needed.

A Natural Home for an Inherited IRA

Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA must empty the account by the end of the 10th year after the original owner’s death. If the original owner had already started taking required minimum distributions (RMDs), the beneficiary generally must also take annual withdrawals during years 1 through 9.

That leaves many heirs with a forced, taxable spend-down and no clear plan for the money. Using the same staggered structure to direct those distributions into a life-based long-term care policy over the 10-year window can:

• Spread the tax bill across 5-10 years instead of facing it in one large lump sum
• Satisfy the 10-year deadline on a set schedule
• Turn an inheritance into lasting protection for your own future care, or a death benefit for your own heirs

Certain beneficiaries, including surviving spouses, minor children of the original owner, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the original owner, follow different rules. Product availability for qualified and inherited IRA funding varies by carrier, so this strategy should be coordinated with your tax advisor.

10Is Asset-Based Long-Term Care Right for You?

It tends to fit well if you:

• Are in your 50s, 60s, or early 70s and in reasonably good health
• Have savings you could set aside, but don’t want care to consume your portfolio
• Want to protect a spouse or leave something to your family
• Have an IRA or inherited IRA you’d like to put to more deliberate use
• Own an older annuity with large untaxed gains you don’t need for income
• Have health concerns that make life insurance hard to get. The annuity-based approach may still be available.

If your assets are more limited, Medicaid planning may be the better path.