Long-term Care Insurance Alternatives: How To Craft A Flexible Plan To Help Cover Future Health Needs

Long-term care can become one of the biggest expenses in retirement. Yet, traditional long-term care insurance doesn't fit everyone's budget or needs.

Rising premiums and stricter underwriting have pushed many people to seek more flexible ways to protect their savings and future care choices.

We'll cover what you need to know about long-term care insurance alternatives with modern strategies for wealth protection.

What long-term care policies cover

Long-term care insurance (LTCI) helps pay for the kind of support many people need as they age. Think of assistance with daily activities such as bathing, dressing, eating, walking and buying groceries.

Policies typically reimburse a daily or monthly amount for such services as in-home aides, adult day care, memory care and skilled nursing. The goal Is to preserve assets and give families options when health needs change.

Bryan Henry, president of PeterMD, recommends looking beyond conventional insurance and finding alternatives for long-term care.

"Traditional LTCI has become harder to buy and harder to keep," Henry says. "Premiums run high, which can be unpredictable. Policy language is dense. Benefits can be limited or exclude certain situations.

"Many insurers have left the market over the past decade, and those remaining often require strict medical underwriting. That's why more people are now looking for flexible alternatives."

Here are some strategies to consider.

Long-term care insurance

Hybrid insurance products

Hybrid insurance policies combine life insurance or annuities with long-term care benefits. If you need care, the policy accelerates benefits to cover it. If you don't, your heirs receive a death benefit, or you can access the cash value.

These policies typically come with guaranteed premiums or at least more predictable funding than stand-alone LTCI.

On the tax front, many hybrid benefits are treated as tax-free when used for qualified long-term care under federal rules. See IRS guidance related to qualified LTC benefits and Form 1099-LTC.

Some policyholders use a tax-free 1035 exchange from an existing life insurance policy or annuity to fund a new hybrid contract. Check FINRA's overview of 1035 exchanges.

Annuities with long-term care riders

Annuities can be customized with riders that boost income, or they can provide extra benefits if you become chronically ill. You're essentially building a baseline retirement paycheck with an added layer that helps cover care if needed.

Some riders multiply your monthly benefit for a set period if you need assistance with the activities of daily living. Others waive certain fees during a qualifying care event.

These designs vary widely by carrier, so, you need to understand the contract language, such as how benefits trigger and what counts as covered care.

Health savings accounts (HSAs)

If you're covered by a high-deductible health plan, an HSA can be surprisingly powerful for future care.

HSAs come with a rare triple-tax advantage:

• Contributions might be deductible or pretax
• Funds can be invested and grow tax-free
• Withdrawals for qualified medical expenses are tax-free

Long-term care services and a portion of LTC insurance premiums might qualify as deductible under IRS rules. See IRS Publication 969 and Publication 502.

As contribution limits change each year, check the current numbers before you automate deposits.

Alternative investment strategies

Self-funding and portfolio diversification

Some households prefer to self-fund care. That doesn't mean ignoring the risk; it means creating a dedicated long-term care reserve in your financial plan and investing it thoughtfully.

You might segment a portion of your portfolio as a long-term care reserve sized to your goals and family health history. Match some of that reserve to inflation-protected assets or short-duration bonds to reduce sequence risk.

A TIPS ladder or a balanced mix of stocks and bonds can help keep pace with rising care costs. Keep cash for the first six to 12 months of potential care, then invest the rest for growth and resilience.

You can also add stopgaps (such as a smaller hybrid policy) to cap worst-case scenarios while still relying on investments to cover the bulk of expenses.

Real estate investment

Real estate can serve two purposes: An income source now and a fallback for care later. Here are some potential investments:

• Rental properties can generate predictable cash flow
• Real estate investment trusts (REITs) offer a simpler way to access the sector without being a landlord
• A reverse mortgage can turn home equity into tax-free loan proceeds to pay for in-home help or facility care, but you need to understand interest accrual and repayment rules before signing

Jeffrey Zhou, CEO and founder of Fig Loans, notes that alternative investment strategies work best when real estate and self-funding are integrated into a broader retirement plan. He emphasizes that both portfolio-based funding and property assets can complement each other in managing long-term care costs.

"A well-structured approach that combines diversified self-funding strategies with real estate can provide steady cash flow in retirement," Zhou explains. "This helps offset rising care costs while preserving the underlying assets as part of long-term wealth."

This perspective highlights how a balanced mix of liquid investments and property income can improve financial resilience. It ensures retirees are not overly dependent on any single source of funding for healthcare and long-term care needs.

Government programs and community resources

Medicare and Medicaid

This is where confusion often creeps in. When it comes to government programs, there's a line drawn between the two:

• Medicare covers medical care, not custodial long-term care. It might pay for limited, short-term skilled nursing or rehab after a qualifying hospital stay. However, it's not going to help with activities of daily living that most people eventually need.
• Medicaid does cover long-term care, but only for people who meet strict income and asset rules, which often means spending down savings first. There's also a five-year look-back period on asset transfers in most states, plus complex spousal protections to navigate.

Proper planning helps you qualify for benefits when needed while protecting your life savings and your home. The key is understanding these programs' rules well before you need care.

Local and community resources

Don't overlook your local support network:

• Area agencies on aging can connect you with home-delivered meals, transportation, caregiver respite and benefits counseling. Eldercare Locator is a perfect example of this alternative access for older people.
• Nonprofits and faith-based groups often offer volunteer services. They provide older people with long-term care.
• Large organizations, such as AARP Caregiving, maintain extensive caregiver guides and checklists you can use right away.

There are more choices than there used to be

Traditional long-term care insurance isn't your only option. With rising longevity and rising costs, planning ahead makes sense, and you have more choices than you used to.

That's why you should consider hybrid life policies, annuities with care riders, HSAs, a thoughtful investment reserve and even targeted real estate. They can work together to protect both your care choices and legacy.

The sooner you prepare for future care costs, the more financial stability you're likely to have later.

Related Content

• This Trust Can Protect Your Assets From Long-Term Care Costs
• Planning for Care If You Can No Longer Care for Yourself
• I'm a Financial Planner: Here Are 3 Ways to Plan for the Soaring Cost of Long-Term Care
• Four Tax-Friendly Ways to Pay for Long-Term Care Insurance
• How to Negotiate to Lower Your Medical Bills: These Strategies Can Help Reduce Your Costs

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.