4 Best Alternatives to Long-Term Care Insurance

Long-term care insurance is a specific type of health coverage that reimburses for services not included in traditional medical plans or Medicare. It can be used by people with a variety of issues from different age groups, but it may not be the best option for all.

The potential need for long-term care should not be overlooked. A majority of people will require it when they get older. Approximately 70% of people who turn 65 today will require long-term care at some point, according to the U.S. Department of Health and Human Services.

Long-term care insurance is expensive and not everyone is eligible, but these four alternatives can provide good coverage for those in need of long-term care.

Long-Term Care Insurance: Affordability and Eligibility

Long-term care insurance can be expensive. It’s generally more cost-effective when purchased before a person turns 60. As of 2020, the average annual premium for a healthy couple, both age 55, was $3,050, according to the American Association for Long-Term Care Insurance.

Even at these high premiums, insurance companies that offer this type of insurance can reject applicants after probing into their health histories.

Due to these factors, people may need other options for long-term care coverage.

1. Short-Term Care Insurance

Short-term care insurance, also known as convalescent insurance, typically offers $100 to $200 per day of healthcare coverage for one year or less.

Since there is no long-term commitment for the insurance companies, the premiums are normally lower than traditional long-term care coverage options. The average short-term care premium for a 65-year-old, for example, is $105 a month.

Since the premiums are lower and the coverage is for a year or less, many applicants who are rejected for long-term-care coverage may be accepted by short-term care insurance. These types of policies have short or no elimination periods, allowing benefits to start immediately for those in need.

With short-term care insurance, the benefits normally reset. This means that if someone files a claim but then recovers prior to receiving the full benefit, another claim can be filed in the future.

While this type of insurance coverage can help those who are rejected for long-term care insurance, the brevity of the insurance coverage could make it a partial solution. Medicare covers post-hospitalization rehab for up to 20 days, making it possible to stretch coverage that much farther than one year.

2. Critical Care or Critical Illness Insurance

Critical care and critical illness insurance are two types of coverage that extend lump-sum cash payments to people who are diagnosed with cancer, stroke, heart attack, and other serious illnesses.

In addition, two major carriers, Aflac and Guarantee Trust Life Insurance Co., offer critical care and critical illness insurance with daily or monthly benefits for inpatient rehab and continuing care.Aflac's daily benefits can last up to six months and Guarantee Trust's monthly benefits can last up to two years.

Daily and monthly benefits aside, critical care and critical illness insurance are normally less expensive than long-term care insurance. For example, if a 60-year-old woman is looking for critical care or illness insurance, she can receive a $50,000 lump sum payment from a plan for as little as $100 a month.

Even a monthly benefit insurance structure purchased through Guarantee Trust can get someone in need of long-term care up to $2,000 a month for two years and only cost around $110 a month.

3. Annuities With Long-Term Care Riders

For people who are rejected by traditional long-term care insurance providers, it is possible to take out an annuity with a long-term care rider. Money invested in an annuity with a long-term care rider can be used tax-free to pay for long-term care as defined under the contract.

This gives a person a stream of monthly payments they can use specifically to pay for the care needed.

Medical underwriting for this type of option is less stringent than traditional long-term care, resulting in greater freedom in how people can use the care benefits. If it turns out long-term care is not needed, it is possible to redeem the accumulated value of the annuity. Upon the passing of the annuity owner, the heirs collect on the funds, minus any withdrawals for long-term care.

However, annuities need to be purchased upfront, requiring a large payment in return for monthly cash flow for a defined period. Annuities like these have minimum up-front premiums of $50,000, and the money is normally locked in for five to 10 years.

4. Deferred Annuities

Long-term care can be preplanned through the use of a deferred fixed annuity. If people take into account that they have a 70% chance of needing long-term care after age 65, it is smart to hedge against future costs by putting money down prior to retirement in return for a promise an insurer will pay monthly sums starting when a specific age is reached.

Say, for example, a person is 60 years old and decides to purchase a deferred annuity for $100,000. When that person reaches a designated age (72 if the annuity is in a tax-qualified retirement account), the distributions begin.

The amount of the payment will depend on the type of distribution. Required minimum distributions require calculations from an Internal Revenue Service schedule. Other distributions will typically depend on the contract terms of the annuity.

A deferred annuity differs from an annuity with a long-term care rider because it is not designed exclusively for long-term care. It can bring peace of mind to know that there will be monthly cash flow to pay for it if long-term care is needed.

A deferred annuity does not cover any long-term care needed prior to retirement.

The Bottom Line

A majority of people over age 65 will need long-term care at some point. Because long-term care insurance isn't for everyone, it's prudent to explore other options. Consider the above alternatives when planning ahead to pay the high costs of long-term care, should you need it down the road.