[Last updated September 25, 2024]
Many people consider long-term care insurance a helpful planning tool to pay for senior care. A long-term care annuity is another option to help pay for senior care. While these products share similarities, they differ in a few key ways. To help you make a more informed decision on how to finance long-term care for yourself or a loved one, we outline what you need to know about long-term care annuities and insurance policies.
What is long-term care insurance?
Long-term care insurance is a form of health insurance that helps people cover the cost of personal care that regular medical insurance does not cover. Long-term care insurance will typically reimburse the cost of care associated with nursing homes, in-home care, assisted living facilities, and adult day care centers.
Typically, long-term care insurance is purchased when a person is in their 50s or 60s when they are nearing the age that they will need some form of long-term care. As the name would suggest, it is a type of insurance, so you will have to go through the claims process to be reimbursed for the costs associated with long-term care.
What is a long-term care annuity?
A long-term care annuity is a special type of annuity designed to help people pay for the costs associated with long-term care. People typically buy long-term care annuities to protect their retirement savings since long-term care can be costly. Long-term care annuities can work in various ways, but most commonly, the insurer will pay a fixed amount to the insured each month.
The amount the insured is paid each month is based on how much money they paid into the annuity. This means depending on how much care you require and how much you’ve paid, your long-term care annuity may or may not cover the full cost of your care.
Long-term care insurance vs. long-term care annuities
Long-term care insurance and long-term care annuities differ in a few key ways. One of the most prominent differences is how the policyholder receives payments. A long-term care annuity is paid monthly once it enters the payback period. Long-term care insurance, on the other hand, is paid only when the policyholder incurs a long-term-care-related expense.
They also differ in how the insured pays the policy. With a long-term care annuity, the policyholder pays either an upfront lump sum or a series of monthly payments until the annuity begins to pay out. Once the annuity begins to pay out, the holder no longer has to make payments. With long-term care insurance, the insured must pay their premium in perpetuity (unless they are currently receiving benefits).
Pros and cons of long-term care insurance and annuities
When making an important purchase like this, it’s important to weigh the pros and cons of each option. Both have benefits and drawbacks, so because neither option is perfect, you must decide which one works better for you.
Long-term care insurance benefits
- You can rest easy knowing your long-term care needs are covered by insurance.
- There are a variety of policies for you to choose from, making it easy to tailor a policy for your specific needs.
Long-term care insurance drawbacks
- If you have a preexisting condition, you may be denied coverage.
- Premiums become more expensive if you try to buy a policy after the ideal age range.
- Long-term care insurance can be costly and must be paid monthly.
- If you never require long-term care, you’re paying for insurance you will never use.
Long-term care annuity benefits
- It may be easier to get approved for a long-term care annuity than long-term care insurance if you have an existing health issue.
- Long-term care annuities can be much more cost-effective than long-term care insurance.
- You can lean on your long-term care annuity to cover other unexpected costs in a pinch.
Long-term care annuity drawbacks
- Long-term care annuities may require a large upfront payment that many people can’t afford.
- Annuity payments are considered taxable income if they aren’t used to pay for costs associated with long-term care.
Long-term care insurance and long-term care annuities are great ways to help finance the cost of long-term care. Having one of these instruments can be key to a happy and successful retirement because so you don’t have to pay for all the costs of long-term care out of pocket.
