How to Fund Long-Term Care: Self-Funding, LTC Insurance, and Medicaid

Funding long-term care is the biggest financial risk faced by US retirees. Long-term care refers to assistance with activities of daily living that a person might require — typically in old age — including home care (provided by family or paid home aides), assisted living, and nursing home care. An estimated 70% of US seniors aged 65 and above will need some form of long-term care over their lives.

Retirees who require long-term care generally need it for a few years. According to 2022 research commissioned by the Department of Health and Human Services, the average duration of disability requiring care is about 3.2 years for women, with men generally needing care for a shorter period. That said, about one in five adults (22%) will have a care need lasting more than five years. Planning for long-term care is a critical — and often-ignored — component of retirement planning.

The potential cost of long-term care can be daunting. Here's what long-term care costs look like across the US, according to Northwestern Mutual:

• Adult day care, three days per week: $16,000 per year

• Assisted living facility, one-bedroom apartment: $66,000 per year

• Home-based care, eight hours per day: more than $90,000 per year

• Skilled nursing home, private room: $115,000 per year

You can also look up estimated costs by state for home health care, assisted living, and skilled nursing home care.

The high cost of professional long-term care may be one reason why many Americans opt for unpaid care from family members and friends. Approximately half of all seniors do not receive any paid long-term care over their lifetimes, and roughly one quarter receive more than two years of paid care.

Understanding your long-term care funding options

Planning ahead can help ease the potential burden on yourself and your family. There are currently three main options for funding long-term care on your own: self-funding, long-term care insurance, and Medicaid.

1. Self-funding

Self-funding means paying all long-term care expenses out of pocket from retirement savings and other assets — including your home, which could be sold or used as collateral if needed. A rough calculation can help you think through a worst-case scenario. About 12% of nursing home residents stay for five years or more, so a conservative estimate might put worst-case costs around $100,000 per year over five years, or $500,000 per person (not accounting for the time value of money).

Most households will need far less than that. And Medicaid, long-term care insurance, and unpaid family care can all fill in gaps when assets fall short.

2. Long-term care insurance

Most insurance companies have stopped selling stand-alone long-term care policies. Today, only six insurers sell standalone LTC coverage, compared to more than 100 insurers active in the 1990s. What's more common now are "hybrid" life insurance products bundled with long-term care benefits. Before going that route, it's worth thinking through whether you actually need life insurance in retirement, and whether separate standalone policies might offer the same coverage for less.

The ideal time to buy LTC insurance is in your 50s to 60s. Premiums are more affordable at younger ages, and people in older age ranges are denied coverage at higher rates. Chronic health conditions, including a history of stroke or diabetes, or psychiatric illness, can be grounds for disqualification.

The following table shows LTC insurance applicant rejection rates by age (2021 figures):

Finding the right company and policy matters. The insurer should have a solid reputation in the LTC market and a history of stable premiums over time. Key policy features to understand include:

• Inflation protection — benefits that increase roughly in line with the cost of living

• Reimbursement payments — benefits that cover actual LTC expenses rather than paying a fixed amount

• Coverage for both home-based and facility-based care

• Claim coordination provisions

LTC insurance is generally expensive. As of 2022, a couple aged 55 could expect to pay about $5,000 per year for a policy with $165,000 in total benefits and 3% annual inflation protection. Choosing a longer "elimination period" — the number of initial days of care for which benefits are not paid — can bring premiums down if you have the assets to cover that gap.

3. Medicaid

Medicaid is government medical insurance for lower-income households and is currently the only public program that funds long-term care. Medicare, by contrast, is the government health insurance program for seniors, but it covers only short-term care during medical recovery or treatment, not ongoing long-term care.

Medicaid kicks in once assets and income fall below certain thresholds, functioning as a backstop when other resources run out. Access can be uneven, though some recipients struggle to find facilities or home care providers that accept Medicaid reimbursement rates.

In some situations, it's possible to set up "asset protection trusts" that help a person become eligible for Medicaid without fully depleting their assets. Some states also allow "income trusts" for people whose income exceeds the eligibility limit, directing excess income toward care expenses. A financial professional or attorney who specializes in Medicaid planning can help you think through whether either approach fits your situation.

Start planning for long-term care before you need it

Long-term care doesn't fit neatly into a retirement budget. The costs are real, the timeline is unpredictable, and most people wait too long to think about it. But the earlier you start, the more options you actually have: self-funding, insurance, Medicaid, or some combination of all three.

Getting a plan in place isn't just about protecting your assets. It's about keeping the weight of this off the people who love you.