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By Nathan Paulus
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Director of Content Marketing, MoneyGeek
Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.
MoneyGeek is dedicated to providing trustworthy information to help you make informed financial decisions. Each article is edited, fact-checked and reviewed by industry professionals to ensure quality and accuracy.
Updated: August 20, 2024
JF
JF
Julie Fry is the founder and COO of Gentreo. This award-winning estate planning platform helps everyone throughout all of life's inflection points, such as caring for an aging parent, getting married or divorced, moving to a new state or welcoming a new baby. Julie formerly led marketing and membership at the National Association of Home Care and Hospice.
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Ric Edelman
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Ric Edelman, the founder and CEO of Edelman Financial Services, hosts a weekly radio show and a syndicated television show. He is also a New York Times best-selling author who has published eight books on personal finance. His latest book isThe Truth About Retirement Plans and IRAs. With 122 financial planners and 42 offices coast-to-coast, Edelman Financial Services manages more than $15 billion for more than 30,000 individuals and families.
NP
By Nathan Paulus
NP
Director of Content Marketing, MoneyGeek
Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.
MoneyGeek is dedicated to providing trustworthy information to help you make informed financial decisions. Each article is edited, fact-checked and reviewed by industry professionals to ensure quality and accuracy.
Updated: August 20, 2024
Advertising & Editorial Disclosure
If you or a loved one suffered from a sudden and debilitating medical condition that required long-term care, how prepared would you be? As the U.S. population ages, and as millions of baby boomers in particular move into their later years, the need for long-term care will grow dramatically. Yet figuring out how to finance the high cost — before you might need it — can be bewildering.
Only adults with little or no assets and very low household income levels can rely on Medicaid to pick up the costs of long-term care, though eligibility requirements vary by state. Most others in need of long-term care will have to depend on some combination of long-term care insurance, personal savings, investments, income from Social Security and pension benefits, and proceeds from the sale of a home.
This guide will help you understand the various types of long-term care services as well as the financing strategies and options that may make it more affordable. You will also learn about alternatives for those without insurance coverage or assets.
Costs of long-term care options vary widely based on factors including your care needs, your age and your health. This chart provides median annual costs in the U.S. for different long-term care options.
Long Care OptionSemi-private room - $90,155
Private room - $102,200
$175,200 (for round-the-clock care)
Source: Genworth 2019 Cost of Care Survey
Rates based on 440 regions throughout the U.S.
Many people don't think much about financing long-term care until it's too late and costs have already drained their savings account. It can take decades of careful planning to save enough to cover these costs, which have risen much faster than inflation. Among the potential sources people may tap to pay for these expenses: long-term care insurance, certain life insurance policies, reverse mortgage proceeds and annuities with long-term care provisions. Each funding method has its pros and cons.
Long-term care insurance policies, which cover all or a portion of the cost of care, have become increasingly popular. They vary widely with regard to price, policy type, and amount of coverage. With most policies, to begin cashing in on the insurance, you must be incapable of performing at least two tasks of daily living — for example, bathing and dressing. The cost of long-term care insurance depends on your age, gender, health and level of benefits you choose. The older you are when you buy the policy, the higher the premium. If your health is poor, you may not qualify for insurance at all, or you could face much higher premiums.
Long-term care insurance coverage may pick up all or most of the tab for nursing home stays, assisted living, home health care (sometimes including 24-hour caregivers or nurses), adult day care and Alzheimer's facilities. You may be eligible for a federal income tax deduction on premiums.
Long-term care insurance is often prohibitively expensive, and you could end up spending more for premiums than you would for the care. In some cases, premiums have doubled as people approached retirement age, making it unaffordable even after they spent years paying into it. You might be better off investing your money and using the profits to pay for care.
More than one-third of people who buy long-term insurance policies at age 65 or older lapsed their coverage before the insurance company paid out any benefits. Of people who stayed in long-term care facilities and had bought long-term care insurance, about half of them never collected any benefits.
If you have few or no assets, Medicaid will cover your stay in nursing homes, assisted living and sometimes with in-home care.
One of the big downsides to long-term care insurance is that you may never actually receive any benefits. Life insurance policies with long-term care riders get around this drawback because you will receive payouts, either in the form of long-term care coverage or as benefits to your spouse, children or other heirs at the time of your death. This form of financing long-term care has become increasingly popular in recent years, with more and more of the best life insurance companies offering policies with long-term care riders.
Your premiums won't be wasted if you never need long-term care. Also, these hybrid policies typically allow you to get a tax-free advance on your life insurance and death benefit while you are still alive, though you might have to pay an extra premium to get this. As with traditional long-term care insurance, you receive benefits if you must live in a nursing home or can't perform at least two activities of daily living.
With these hybrids, the rates are guaranteed to remain the same, unlike with traditional long-term care insurance policies.
Your benefits to help cover long-term care typically are limited to the amount of the death benefit, which can be much lower than a long-term care policy. Some hybrid policies do not cover long-term care for Alzheimer's and other cognitive deficiencies.
Adding long-term care benefits can increase the basic premium by as much as 20 percent. Another concern is that many of these hybrid policies have been in existence five years or less. As a result, they lack the track record of long-term care insurance with regard to clients seeking to collect benefits.
If you rely on the hybrid policy for long-term care, the death benefit can be lost or severely diminished, leaving survivors with little or no life insurance proceeds.
Hybrid annuity products (it's a hybrid because it combines long-term care in an annuity) vary greatly. Generally, you make a series of payments or a single payment to an insurance company for a fixed deferred annuity with a long-term-care rider. The annuity, in turn, will provide you with monthly income over a number of years or for life. Deferred annuities have an accumulation period - the time between payment of premiums and income from the annuities. It could be years later.
A deferred annuity generates two funds. One of them goes toward long-term care, and another can be used any way you choose, including passing on the funds to your heirs.
Annuities can require that you pay an upfront premium of $50,000 or more. You can rely on the long-term care annuity immediately, but must await a specified date to access the cash fund. Also, the money is frozen for five to 10 years with significant penalties for early withdrawals.
Generally, reverse mortgages allow homeowners age 62 and older to convert the equity in their homes into cash to help pay for long-term care and other costs. These special mortgages are complex and potentially expensive so make sure you understand the terms and comparison shop before you decide on a particular lender. Some financial experts say reverse mortgages should be considered as a last resort. If you're considering this route, seek the guidance of a certified financial counselor beforehand.
Reverse mortgages are sometimes one of the few sources of significant cash to pay for long-term care. Payments are tax-free and can be received as a lump sum, a credit line or by monthly payouts. The payout doesn't reduce Social Security or Medicare benefits but it can cut Medicaid and Supplemental Security Income entitlements.
Reverse mortgages work best for seniors who intend to stay in their home at least three years and who need in-home living assistance, or for couples with one spouse remaining at home and the other in a long-term care facility. The reverse mortgage remains in effect until the last homeowner sells, moves or dies.
The Consumer Financial Protection Bureau calls reverse mortgages complex products that are typically "difficult for consumers to understand," and notes that too many people apply without enough cautionary counseling and clear information.
With these mortgages, homeowners are still responsible for paying the real estate taxes and for maintaining the property. Also, the costs of reverse mortgages can be high, consequently draining some of your equity. A better alternative may be selling the house and using proceeds to pay for long-term care.
Most people associate long-term care with nursing homes for the frail or elderly. But it also aids younger people who suffer a sudden heart attack or stroke, and those with disabilities who need help with daily living tasks.
Long-term care encompasses a broad array of living arrangements and services. It includes home health aides for people who choose to age in place but need help with daily living tasks and medications, for example. Community-based facilities such as adult day care, which clients attend during the day, and assisted living facilities also offer long-term care services.
If you possess few or no assets when you need long-term care, your care options could be limited considerably. Many people decide against long-term care insurance or other means of financing care, assuming Medicaid or Medicare will cover the costs. But Medicare generally does not cover long-term care, except for short stints of rehab, and Medicaid carries strict limits on income and assets.
