Understanding the Two Paths to Long-Term Care Coverage: Traditional vs. Asset-Based Policies

Written by Erin Mills, June 2025

Planning for long-term care is a critical part of a well-rounded financial strategy but with so many options, it’s easy to feel overwhelmed. Two of the most common approaches are traditional long-term care insurance and asset-based hybrid long-term care policies. Each offers unique benefits and trade-offs. Let’s examine the key differences between these options.

Traditional Long-Term Care Insurance

This was the only way to provide coverage for long-term care expenses in the past and were common among the older generations. These require monthly or annual premiums in exchange for long-term care benefits should you ever need assistance with daily living activities (such as bathing, dressing, or eating) due to illness, injury, or cognitive decline.

Key Features:

• Use-it-or-lose-it: Much like car or homeowners’ insurance, if you never need care, the policy typically doesn’t pay anything back.

• Premiums may increase: Insurance companies can (and do) raise rates over time.

• High leverage: Generally offers more coverage per dollar of premium, especially if purchased younger and in good health.

• Tax-deductible potential: For some individuals or business owners, premiums may be tax-deductible.

Asset-Based Hybrid Policies

Introduced to the marketplace after the changes in the Pension Protection Act (PPA) went into effect in 2010, these policies combine long-term care coverage with life insurance or an annuity. Instead of paying premiums indefinitely, you use an existing asset (like cash from a savings account or investments) to fund the policy, often through a single lump sum or a limited number of payments.

Key Features:

• Return of premium: If you never need care, your heirs may receive a death benefit.

• Premiums are guaranteed: No rate increases over time.  Many people fund them with a one-time lump sum and never have any additional out-of-pocket expense for the policy.

• Flexibility: Some policies allow partial withdrawals or even offer a full money-back guarantee.

• Efficient for self-insurers: A great fit for those who’ve earmarked savings for potential care expenses.

Which Is Right for You?

It depends on your goals, cash flow, and risk tolerance. Traditional policies may be a good fit for those who want the most coverage for the lowest initial cost. Hybrid policies are appealing if you dislike the idea of “wasting” premiums and prefer knowing your money will benefit you or your family in some way.  The best time to consider your options is while you're healthy because these policies require underwriting, and eligibility becomes harder with age or declining health.

If you're unsure which path makes the most sense for your long-term care plan, let’s talk. A little planning now can bring a lot of peace later.

Long-term care insurance, life insurance and riders contain exclusions and limitations. Eligibility for long-term care and life insurance and additional policy benefits and qualification for benefits is determined on a case-by-case basis. Guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company. Annuity contracts have fees and expenses, limitations, exclusions, holding periods, termination provisions, surrender charges and terms for keeping the annuity in force. Qualified annuities withdrawals may be taxable as ordinary income, and withdrawals prior to age 59½ may be subject to a 10% penalty tax. For costs and complete details of coverage, please contact your financial advisor.