We know that providing for long-term-care (LTC) expenses is an important part of retirement planning. As people live longer and face possible physical or cognitive impairment, most will require some degree of help at a certain age with at least two “activities of daily living”—eating, bathing, dressing, toileting, transferring to or from a bed or chair, and controlling bathroom functions.

What’s less clear is how to pay for it.

“There are three basic ways to pay for long-term care,” observes F. Michael Zovistoski, a CPA, certified financial planner and managing director at UHY Advisors NY, based in Albany and New York City. “Be rich … and pay out of pocket. Be poor, and apply to Medicaid for coverage. Or be insured.”

Linked Benefits

Private health insurance and Medicare won’t fully cover LTC expenses, which can be so enormous they completely upend a client’s retirement. So what should advisors recommend to mitigate this potential liability?

One choice is traditional, stand-alone LTC insurance. Premiums have been on the rise, however, and this coverage typically comes with strict underwriting standards. You have to be young enough and healthy enough to qualify.

In recent years, the fastest-growing areas of the LTC market have been asset-based or hybrid products. These are life insurance policies and annuities with linked LTC benefits.

“More people are looking into the hybrid plans than ever before,” says Brian Gordon, president of MAGA, an LTC planner and insurance provider in Riverwoods, Ill. “One of the big reasons is so they can have a guaranteed premium and a guaranteed benefit.”

Many clients, says Gordon, don’t want to pay for LTC insurance they may never need. With LTC benefits linked to a life insurance policy, on the other hand, clients are ensured a payout one way or the other. Whatever benefits they don’t spend for LTC costs remain in the death benefit.

What’s more, it’s easier to qualify for this type of LTC coverage. “Hybrid policies have become very valuable as a means to pay for LTC,” concurs Edward Kohlhepp Sr., a certified financial planner in Doylestown, Pa. “With a life policy, this [LTC add-on] will add a cost to the policy, but then the death benefits—the face value of the policy—can be accelerated to the policy holder if needed for LTC issues. Even though underwriting will be needed for the life policy, it might permit the applicant to get LTC insurance when he might be [otherwise] turned down for the LTC.”

Other Ways To Use Life Insurance

But before you advise clients to buy life-LTC coverage, some industry watchers insist it’s important to determine whether the client actually needs (or still needs) the life policy. “First and foremost, there has to be a need for life insurance,” says Nelson Rivera, director of insurance services at Clarfeld Financial Advisors in Tarrytown, N.Y. “If there is no need for the life insurance, other options should be explored.”

Such options could include borrowing against the cash value of the life policy or selling the policy outright to raise funds. But such moves should only be done carefully. “Before they consider settlements, or deciding to terminate any plan, clients must fully investigate every alternative available,” says Jayne Alford, a financial planner and managing director at IFP Insurance Group in Tampa, Fla. “You don’t get a do-over.”

Moreover, there are other ways to use life insurance to help fund LTC expenses. Clients could also consider adding an accelerated benefit rider to their life insurance. It can work somewhat like an LTC rider, but it has no additional costs associated with it. “This would allow them to spend down the death benefit to pay for LTC expenses,” explains Rivera. “Benefits can be utilized until the death benefit is fully depleted. … If there is any remaining death benefit when the insured dies, the remaining death benefit is paid to the beneficiary or beneficiaries.”

Explore Every Alternative Available

As popular as hybrid life-LTC insurance has become, it isn’t for everybody. “We generally do not endorse the use of hybrid or linked life-LTC products,” says Zovistoski, of UHY. “Our rationale is, if there is a life insurance need and the client is able to access the policy for LTC needs, then the policy will not be [as] available for the life insurance need when that occurs. Having a hybrid product puts the pressure on the client to choose which need has priority, and typically the client will use the policy to address the current need.”

In certain situations, he says, he’d recommend clients fund LTC needs out of accumulated assets and separately purchase a basic life policy to replace those assets in the estate. That way, they can continue to “meet their postmortem goals of protecting a spouse, providing for children, [fulfilling] a charitable intent, etc.”

Using Annuities

Another option is to use annuities with linked LTC benefits. They work in a similar way to hybrid insurance policies, but again, they’re not right for all clients. “Annuities with LTC riders can be a great way to help someone who might not qualify for life insurance or [someone who] may be approaching retirement to plan for LTC expenses with less red tape,” says John Alcantara, wealth management advisor at the Alcantara Financial Group, a unit of Northwestern Mutual Wealth Management Co., in Las Vegas. However, he adds, “Clients should review how payout options are affected by including the LTC riders and decide if there are more appropriate ways to pay for the care.

An LTC annuity rider, of course, comes with an additional fee. “I am not convinced adding [a long-term-care] rider to any annuity makes sense,” says Zovistoski. “When someone takes out an annuity, they are looking for tax-deferred growth, maximum income and guarantees. That is their focus. That focus gets clouded when additional fees and conditions are added.”

Another concern Zovistoski has is that clients don’t always understand the complexities of annuities. They are “sometimes difficult for clients to fully grasp and understand,” he says. If an advisor adds a long-term-care rider to the annuity, “due care must be given to ensure the client understands the cost and benefit, along with the positive and negative consequences of wrapping a [long-term-care] rider onto an annuity.”

Not One-Size-Fits-All

In general, LTC solutions are never one-size-fits-all. Savvy advisors will construct custom strategies for clients. “Innovation begins with knowing your clients and helping them identify their goals,” says Zovistoski. “All clients and their goals are unique, and therefore their plan to achieve the goals must be customized.”

Gordon at MAGA helped one client use a 1035 tax-free exchange to maximize LTC benefits. “A 72-year-old female had a $100,000 annuity with over half being a gain,” he says, meaning it was taxable. “Her original goal was to deplete the annuity first if she were to need care, [but] this would have triggered a taxable event and would not have given her the leverage.” So he helped her convert her taxable annuity into an annuity with an LTC rider, which gave her greater LTC spending potential.

Other Options

Another option for many clients is to use the equity in their homes. Besides home equity loans, some clients choose a reverse mortgage. Though Zovistoski calls this “a last resort”—only for those who have no surviving heirs or beneficiaries, have few remaining financial resources or have planned poorly—others consider reverse mortgages a viable option under certain circumstances.

“When done correctly, a reverse mortgage can be used as a line of credit to pay for LTC expenses,” says Kohlhepp. After all, for many retirees, the home is paid off, or nearly so. A reverse mortgage, he says, can “give them an opportunity to make [an LTC] purchase independent of their savings and investments. The credit line from the reverse mortgage can either be used to pay the premiums on the LTC policy or help fund the actual long-term care itself.”

Yet another option, for those who have a high deductible health plan, is to use a health savings account (HSA). HSAs are tax-advantaged savings vehicles that can be used for not only medical expenses but also LTC costs or LTC insurance premiums. “This might be good reason to open an HSA,” says Alford, at IFP Insurance, “since LTC is one of the things you can use HSA funds for, tax-free, down the road.”

Clearly, in all these scenarios nothing beats planning ahead. “Planning for long-term-care expenses is critical,” she stresses. “If there’s a gap and you have an unfunded long-term-care event, it can blow up your retirement plan pretty quickly.”

For those who haven’t planned ahead or otherwise lack sufficient resources, there’s always Medicaid. “Many attorneys are now starting to focus in the area of elder law to help people use trust strategies in order to qualify for Medicaid and [other] state-provided benefits,” says Alcantara. “If you own assets and don’t want to spend all of these assets on care, and [if you] are comfortable with state-provided benefits, this can be a way to pay for care if you either don’t qualify for or don’t own a long-term-care insurance strategy.”