By Thomas "Greg" Darden, CLTC | March 6, 2020

This is the second part of a 2-part series on long-term care insurance where we look at its funding sources. In Part 1 we looked at what long-term care is, what it should cover, the care setting, and the cost of care.

What are my possible funding sources?

One thing is certain: long-term care (LTC) requires cash flow. If you are faced with paying for LTC, you will need a reliable source of monthly cash flow to cover those expenses. Depending on your level of income, this could affect your lifestyle and other financial commitments you’ve made.

It’s reasonable to consider LTC insurance to fund the cost of home and community care. You might look into reducing your discretionary or “fun” spending for early expenses. Eventually, you might have to tap into assets in the worse-case scenario of needing nursing home care.

As you consider your funding options for LTC, you might look at the following sources:

Your secure lifetime income.

This is cash flow that is guaranteed to last as long as you live. It typically is in the form of:

      • Social Security.
      • Pension, if you have one.
      • Income annuity, if you have one.

Excess cash flow.

These are funds you might be saving after covering your required expenses. Those required expenses are what we call your “minimum dignity floor” and are comprised of food, utilities, transportation, housing and health care.



What types do you have? Where are they located? How easily can they be converted to cash and what would be the tax implications of doing so?

      • Liquid assets, which could include:
        • Bank and brokerage accounts.
        • Retirement accounts.
        • Life insurance cash value.
      • Illiquid assets, which could be difficult to convert to cash when needed for LTC, and could include:
        • Real estate (home equity can be a source of cash flow through a reverse mortgage, for example).
        • Business ownership (this equity could be more difficult to tap).

A critical question is what the projected tax consequences would be of liquidating any of the various types of assets you have.

What are my options for funding my LTC plan?

The options available to you would depend on your unique circumstances.

Fully self-funding. Some people have enough financial resources to fully self-fund LTC should they need it. Even so, it’s important to consider that – unlike insurance – this option provides no leverage. (Insurance creates leverage through pooling of risk among thousands of policyholders.) Nor does this option offer any care coordination services from a team of professionals. Instead, that burden is placed on your family. And, depending on the type of assets allocated and how they’re positioned, the funding source you are envisioning could be subject to market volatility.

Partially self-funding. You could utilize LTC insurance to cover home and community care for the period of time you select. If an inflation benefit is attached, it can keep up with the rising costs of care. You would want to include in your plan how you could self-fund the shortage for a worst-case scenario, if that were necessary.

Fully funding the worst-case scenario through LTC insurance. Using insurance to fund the scenario of an extended stay in a nursing home or memory-care facility is the most expensive option. On one hand, it might be appropriate for some situations. On the other, it is potentially not the most effective approach. It could unnecessarily constrain your lifestyle spending and/or the growth of your assets.

Following are examples of different options you might think about for funding LTC insurance policies to cover part or all of your potential LTC needs. Depending on your circumstances, these strategies can be effective.

A pay-as-you-go policy. Reserve a portion of your liquid assets which you invest moderately conservatively. Use the earnings to pay annual premiums for a traditional LTC insurance policy. This type of policy is much like your homeowner’s insurance – it remains in force as long as you pay the premium. Policies of this type provide the most “bang for your buck” in terms of benefits. The key is to make sure the policy remains affordable, so you can keep it in force each year.

A hybrid insurance policy. Reposition a portion of your liquid assets to purchase an LTC “hybrid” insurance policy via a single premium or limited-time premium payment. It provides fewer benefits per dollar, but offers a death benefit for your heirs of the entire amount you paid into the policy to the extent the LTC benefits were unused. There is also a return-of-premium benefit if you decide to cancel the policy.

Such a strategy can be good for those who have $1 million or more in liquid assets, with a substantial portion in bank or brokerage accounts that can be repositioned with minimal tax impact. It is less attractive for those with most of their assets in retirement accounts. Since the IRS eyes tapping these as taxable ordinary income, liquidating retirement accounts would increase your adjusted gross income and could push you into a higher tax bracket.

In summary, if and how you choose to cover your potential needs for long-term care are very personal decisions. However, those decisions can affect more than just the care you receive. They can also affect those closest to you.

The best decisions will factor in the rest of your retirement plan. Consult your financial advisor if you would like help exploring the impact of each option.