Asset-Based Long-Term Care
Asset based long-term care (LTC), also called linked benefit LTC refers to a life insurance policy that offers tax-free LTC (living) benefits in addition to, or in place of a death benefit. This is not traditional LTC but rather an alternative to self-insuring because benefits are paid from an asset (death benefit) that would otherwise go to heirs upon passing. Most buyers appreciate that in the event where the insured never needs custodial care, their heirs will receive the policy death benefit. Conversely, while collecting LTC benefit payments, the death benefit is also being systematically reduced and can ultimately go to zero when all or most of the available LTC is paid out. So the policy often pays only one benefit (LTC or death) or a lesser combination of the two, but never both in their entirety. Depending on the policy the LTC benefit is either defined in advance or at the time of claim, and can be either smaller or larger than the stated policy death benefit. Naturally premium is larger for a policy that pays larger LTC than death benefit, including policies where the LTC amount is defined at issue. Owners of linked benefit life/LTC policies appreciate that the internal cost for the LTC benefit is often guaranteed not to increase, unlike traditional LTC products. Some policies allow the owner to choose any care provider (like a family member), while others require a licensed care giver, often a registered nurse (similar to traditional LTC). In some cases benefits can be structured to pay if either spouse meets the LTC trigger (2 of 6 ADLs). While no tax deduction is available for linked benefit policies, the benefit payment of these LTC products to the policy owner is always tax-free.
Premiums for asset-based LTC are higher than traditional LTC because a death benefit is going to be paid even if LTC is never triggered. Premiums can be paid monthly, annually or in a single lump sum. Most premium for asset based LTC comes from non-retirement accounts including tax-free transfers from other non-qualified life or annuity products, but some linked benefit products allow for the owner to use an IRA as the premium source as well.