Asset-based long-term care insurance (ABLTC) is a hybrid approach, between self-insuring and purchasing a conventional, indemnity-style LTC policy.
This type of contract was developed for those who do not want to have to bear the full force of paying for care costs out of pocket, but who also do not want to pay years of premiums for something they may never need.
ABLTC is built on a conventional life insurance policy, which is paid for fully at issuance. So a fixed number of dollars today purchases a set death benefit amount. Then comes the modification: if the need for care arises, the death benefit is made available early to provide a source of funds.
The effect of this is that a larger pool of dollars is available for care costs if needed, but if not they remain within the policy and go to the estate (or other designated beneficiary) when the owner dies. This eliminates the use-it-or-lose-it aspect which many consider to be an inherent part of conventional LTC policies.
Consider a case where a retiree wants to set aside $150,000 to serve as a reserve for paying costs should they arise. In order to keep the money absolutely safe, and handy for relatively quick withdrawal, they put the money into one or more CDs. The base amount should be safe, but there won’t be any growth or income to speak of; and what little there is will be subject to immediate taxation.
Conversely, the same $150,000 might be used to purchase $300,000 worth of coverage. That’s double the amount of money available for care-related expenses (vs self-insuring). Typically any withdrawals for care costs would be handled as policy loans (which are generally not taxable).
If no withdrawals were necessary then the whole amount would be paid out, tax free, as a death benefit. Even if there were 25 years in between (e.g. age 65 to age 90), the implied, tax-equivalent yield on an investment producing comparable net growth would be about 4%. Which is of course quite a bit higher than CDs or Treasury bonds would yield.
Details of actual contracts vary by issuer, and the amount of insurance coverage offered per dollar of premium will be a function of the age of the person being covered. That said, these policies are designed for the retiree market, so the insurer is not expecting an applicant who’s 30 years old and in marathon-running condition.