New Ways to Pay for Long-Term Care

In the aftermath of well-publicized premium hikes for long-term-care insurance and the departure of some key insurers from the market, many consumers are skittish about buying coverage. But the need for protection isn’t going away. The median cost of one year in a private room at a nursing home topped $77,000 in 2011, according to a recent survey by Genworth, and the cost is increasing at a rate of about 5% per year. Round-the-clock home care runs even more.

If you don’t want to buy -- or can’t qualify for -- standalone long-term-care insurance, here are three other ways to protect your retirement savings from the potentially devastating cost of long-term care. And if you don’t use the benefits for long-term care, the insurance goes toward a death benefit or an annuity.

Life insurance combo policies. Several companies have introduced new policies that combine life insurance and long-term-care protection. You invest a lump sum or pay premiums for a limited time, and you’re guaranteed to get either long-term-care payouts or a death benefit. For example, if a 55-year-old man invested $10,000 per year for ten years in Lincoln Financial’s MoneyGuard Reserve Plus policy, he’d have a pool of $320,000 in benefits to pay for long-term care, available as a monthly payout of $6,669 for up to four years. If he died without using the long-term-care component, his heirs would get about half of that -- $160,057 -- as a death benefit. Or, if he used some of the money for care, the death benefit would be reduced by the amount that was used to pay for his care.

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These policies may be appropriate for people in their fifties and sixties who still need life insurance but who also want protection against long-term-care costs. Paying the premium all at once shields you from price hikes; some policies that you pay over ten years also guarantee that the premiums won’t rise. Long-term-care benefits are triggered when you need help with at least two daily activities, such as bathing and dressing, or you are cognitively impaired. You can receive care at home, in an assisted-living facility or in a nursing home.

Annuity/long-term-care policies. A few companies, such as Mutual of Omaha, offer a combination deferred an­nuity and long-term-care policy that allows you to leverage your investment three-to-one. For example, a $100,000 annuity could pay up to $300,000 in long-term-care benefits. These policies are attractive to people who already own a deferred annuity and want to exchange it tax-free for a combo annuity policy. And it may be easier to qualify for one of these combo policies than for a traditional long-term-care policy.

If you use the money for long-term-care costs, the distributions are tax-free. Withdraw it for other reasons, however, and you’ll pay ordinary income taxes on the earnings. Unused portions of the annuity (minus any long-term-care payouts) may be left to heirs.

Longevity insurance. This type of annuity pays out only when you reach a certain age -- usually 85. It’s a viable way to ensure that you won’t outlive your savings and to protect against long-term-care costs that often occur at advanced ages. Say you invest $100,000 in New York Life’s Guaranteed Future Income Annuity at age 65; starting at age 85, you’ll receive payouts of $67,000 per year for the rest of your life. You can use the money for any purpose, including long-term care.

Anyone may buy longevity insurance, regardless of their health status, so it may appeal to people who don’t qualify for stand-alone long-term-care insurance. The downside is that you won’t get anything if you die before age 85.