Guide to Paying for Long Term Care Without Breaking the Bank

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.

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.

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.

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.

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.

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.

• In assisted living communities, staffers help residents with daily living tasks, medications and housekeeping. Residents live in private apartments, and the communities usually offer social activities and local transportation. Some have units for residents with dementia, including Alzheimer's Disease. Assisted living is mostly paid by residents' private funds but some communities accept Medicaid.

• In nursing homes, residents can receive round-the-clock skilled nursing care and assistance from aides. Residents have private or shared rooms and typically eat meals in a central dining room. Some homes have separate units for Alzheimer's and dementia patients. Numerous nursing homes now offer short-term rehabilitative stays for patients recovering from an injury, illness or surgery. Medicaid covers costs of long-term nursing home stays but not all nursing homes accept it. Medicare sometimes covers short-term rehabilitative stays.

• For people who choose to age in place, home health care agency workers can help with tasks like bathing, dressing, moving from a chair or wheelchair to a bed and back, paying bills, and transportation to appointments. Medicare stipulates conditions under which it will pay for home health care. Among them: You need to be under the care of a doctor and require skilled nursing care; your condition must be expected to improve in a given period of time; your home health agency must be Medicare-certified; a doctor must certify you're homebound; and you must need home health care only part-time, not round-the-clock. Also, Medicare does not cover home health agency services unless the resident is receiving skilled care like nursing care, physical therapy, occupational therapy or speech-language pathology services from the agency.

• Adult daycare facilities give frail elderly people and Alzheimer's patients daytime supervision and care. That ranges from basic health services, meals and activities to intensive health services for those who might otherwise have to be in a skilled nursing center. Many adult daycare centers offer transportation to and from their facilities. Medicaid covers adult daycare in some case in most states, particularly if the elderly person would otherwise require full-time nursing home care.

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.

• Medicaid
  Like most long-term care insurance policies, to receive Medicaid to cover long-term care costs, you must be unable to perform at least two activities of daily living. Also, you must have spent down your own assets to meet Medicaid stipulations before you can receive coverage for long-term care. In some states, if a couple has $100,000 in assets when one of them enters a nursing home, the resident can receive Medicaid only when the couple's assets have been reduced to $52,000 ($50,000 for the spouse and $2,000 for the nursing home resident). All assets count except for one motor vehicle if it is used to transport the nursing home resident, the resident's home (in some cases) and prepaid funeral plans.

• Veterans
  Disabled or aging veterans with long-term care needs may be able to get help from the U.S. Department of Veterans Affairs. Its benefits pay for care in VA nursing homes and for certain services at home. Veterans without service-related disabilities who can't cover necessary care costs may qualify for veterans' benefits, with copays depending on income. The VA's Housebound Aid and Attendance Allowance Program helps cover home- and community-based long-term care services for eligible veterans and their spouses as a cash supplement to eligible veterans' pension benefits. The Veteran-Directed Home and Community Based Services program helps veterans purchase services and offers counseling provided by the National Aging Network, part of the federal Administration on Aging, in partnership with the Veterans Administration.

• Community Services
  The federal Older Americans Act aims to coordinate and provide home- and community-based services to elderly adults and their families, with an emphasis on keeping them in their community and living independently when possible. Services through the act, provided by state and local agencies and other organizations, include personal care in the home and local transportation. The Older Americans Act is designed for low-income, frail or disabled people over 60, elderly people who are minorities and older adults living in rural communities.

the chairman and chief executive officer of Edelman Financial Services, is the host of a popular weekly radio show, The Ric Edelman Show, and a No. 1 New York Times bestselling author who has published eight books on personal finance. He has been ranked the nation's top independent financial adviser three times by Barron's.

You can find a wealth of resources to help you navigate the confusing terrain of planning to finance long-term care.

The National Association of Insurance Commissioners created a guide for consumers called the "Shopper's Guide to Long-Term Care Insurance.

The U.S. Department of Health & Human Services created guides to long-term care and how to pay for it at longtermcare.gov.

The National Institutes of Health also outlined ways to pay for long-term care.

For information about the services your state provides to family caregivers and the benefits for which you or your family member may be eligible, see: the National Council on Aging's Benefits Checkup, the Administration on Aging's Eldercare Locator and the Veterans Administration's Long-Term Care.

This site, from Elder Law Answers, dispels some common myths about Medicaid and long-term care coverage.

You can call the U.S. Department of Veterans Affairs at 800-827-1000 to obtain information about services available in your area.

Visit the U.S. Administration on Aging to learn more about the federal Older Americans Act, which provides services and programs aimed at enabling elderly people to live independently in their homes and communities.

A Place for Mom provides ways to check a nursing home for quality. The website also offers a checklist for nursing homes.