A Guide to Paying for Care Without Breaking the Bank
The Sobering Cost of Long-Term Care
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.
By 2050: 27 million people will depend on long-term care. (Source: Centers for Medicare & Medicaid Services)
25% of applicants between ages 60 and 69 are denied long-term care insurance coverage. Many companies won't offer coverage after age 75. (Source: 2019 LTC Sourcebook, American Association for Long-Term Care Insurance)
By the Numbers
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 Option
Semi-private room - $90,155
Private room - $102,200
$175,200 (for round-the-clock care)
Adult Day Care
Source: Genworth 2019 Cost of Care Survey
Rates based on 440 regions throughout the U.S.
Financing Options for Long-Term Care
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
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.
Pros vs. Cons
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.
Life Insurance with Long-Term Care Riders
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.
Pros vs. Cons
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 Annuities with Long-Term Care Coverage
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.
Pros vs. Cons
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.
Pros vs. Cons
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.
Long-Term Care: The Basics
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.
What's Covered and Who Pays?
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.
Options for Retirees Without Long-Term Care Coverage
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.
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.
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.
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.
Briefly explain long-term care and who needs it?
As our bodies wear out, we find ourselves requiring assistance with daily life. Called the activities of daily living, insurance companies typically define these as eating, dressing, bathing, toileting, transferring (getting from bed to chair) and maintaining continence. This assistance is called long-term care. At least 70 percent of people over the age of 65 will eventually need some kind of long-term care, resulting in an estimated 12 million Americans needing it each year.
Why is it so important to save for long-term care?
Without planning for it, the cost of long-term care could severely impact your ability to retire comfortably. And since two-thirds of adults will eventually need this type of care, it needs to be a priority. Otherwise you could risk your own financial future.
In addition, your private medical insurance or Medicare will not pay for your long-term care because it's not considered a medical need. This is why planning ahead is so important.
How much does an individual or couple need to save for long-term care in current and future dollars?
Depending on when an individual or couple plans to retire and how long care is needed, the cost will vary. For example, let's say you retired in North Carolina and had to go into a nursing home in 2016 with an average annual cost of $66,065. In 2020, that same nursing home will likely cost $74,357. Over the course of five years, the total cost of care would be $350,748.
How should people save to amass the amount needed to cover these projected costs?
There are four ways to pay for long-term care: personal savings, long-term care insurance, hybrid insurance (a combination of life insurance or annuity benefits with long-term care coverage) and Medicaid, which is reserved only for the poorest.
If you are wealthy and can afford the annual cost, long-term care may not be a financial concern for you, although paying for it yourself might be an inefficient use of capital. But for the majority of the population, paying for these high expenses is not an option.
This is why, for most people, the best solution is to (a) own long-term care insurance and (b) don't delay getting it. If you are in your late 40s or early 50s, buy long-term care insurance now. Not only is it cheaper but you'll never be healthier or more able to qualify for the coverage.
How many U.S. families help a loved one without insurance or funds for long-term care?
Two out of three (66 percent) of older people with disabilities who receive long-term services and support get all of their care from a family member. Another quarter (26 percent) uses a combination of paid help and family members to acquire the help they need.
But if you think you'll just take care of your spouse yourself, or that your kids will, we implore you to come up with another strategy. While family members might handle the task, you could be destroying their lives by asking them to do so.
One in three (33 percent) of caregivers spent more than 30 hours per week on caregiving, and almost half (46 percent) of family caregivers spent more than $5,000 each year in caregiving costs.
Resources to Help You Plan for Long-Term Care
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.
Additional Resources for Family Caregivers
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.
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