How to Pay for Long-Term Care

If you need long-term care as you age, it won’t be cheap. The average estimated cost of long-term care for someone who is 65 today is $138,000, according to a 2016 study by the Department of Health and Human Services. Those who need several years of care could end up spending hundreds of thousands of dollars.

Here’s the kicker: Medicare won’t pay for it. The federal government’s health care benefits program for adults 65 and older will cover short-term stays in nursing homes after a hospital stay. But it doesn’t pay for the type of care you would receive in an assisted living facility or even at home if, say, you were diagnosed with Alzheimer’s disease and could no longer care for yourself.

The cost of professional care is a key reason why so many people rely on family if they need help as they age. According to a survey by Nationwide Retirement Institute, 83% of help provided to older adults comes from unpaid caregivers. 

Of course, your loved ones might be willing to care for you as you age. But being a caregiver can take a huge emotional, physical and financial toll. That’s why it’s important to have a plan to pay for professional care if it’s necessary. Here are the options.

Medicaid

Although Medicare doesn’t pay for long-term care, Medicaid does. This joint federal and state program will cover care in skilled nursing facilities and at home (but typically not in assisted living facilities). However, you must have limited income and assets to qualify for Medicaid. The income amount varies from state to state, but countable assets (which don’t include a primary residence and one car) usually must be $2,000 or less for individuals and $3,000 or less for couples. The local area agency on aging can help you navigate the Medicaid application process.

It’s possible for you to spend down your assets or transfer them to qualify for Medicaid. However, that takes planning to be done properly. You would need to work with an elder law attorney who specializes in Medicaid planning. You can find an attorney through the National Academy of Elder Law Attorney’s online directory.

Veterans Affairs benefits

You can can get nursing home care through the Department of Veterans Affairs if you have a service-related disability. If you have a long-term care need that isn't service related, you ight qualify for the VA's aid and attendance program, which provides an increased monthly penion to cover the cost of care at home for veterans and their spouses. Or you might qualify for veteran-directed care, which provides a flexible budget for home or community based care. Check with your VA benefit office to find out whether you qualify for any of these programs.

Long-term care insurance

A long-term care insurance policy will help cover the cost of care at home, in an assisted living facility or in a nursing home. However, the policy must be in place before there is a diagnosis of a condition that will require long-term care. So if you still are healthy and in your 50s or early 60s, you could purchase long-term care insurance.

The average annual cost of a shared policy with benefits equal to $164,000 for a couple age 55 in good health is $3,050, according to the American Association of Long-Term Care Insurance. That might seem a lot until you consider that in 2020, the median annual cost of an assisted living facility was $51,600, according to insurance company Genworth’s Cost of Care Survey. 

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A long-term care insurance policy will help cover the cost of care at home, in an assisted living facility or in a nursing home. However, the policy must be in place before there is a diagnosis of a condition that will require long-term care.

If you already have long-term care insurance, the policy will start paying once you have cognitive impairment or need assistance with two of the six activities of daily living: bathing, dressing, eating, going to the bathroom, transferring to or from a chair or a bed, and incontinence. However, you’ll need to find out how long the elimination period is on your policy. This is the period (typically 30 days or more) that a policyholder will have to pay for care out of pocket before coverage kicks in.

You’ll also need to know what the benefit amount is (how much the policy will pay out daily or monthly); the benefit period (the maximum number of years the policy will provide benefits); and the benefit maximum (the total amount the policy will pay based on the monthly benefit and benefit period). Long-term care insurance will reimburse policyholders for the cost of care, so you’ll have to file a claim and go through the process of proving that you need care and how much that care costs to get a payout.

[ Read: What You Need to Know About Long-Term Care ]

Life insurance with a long-term care benefit

If you don’t like the idea of paying for insurance you might never use, you might want to consider a permanent life insurance policy with a long-term care insurance benefit. If you don’t need to use the long-term care benefit, the policy will pay a death benefit to your beneficiaries when you die. These hybrid policies tend to be more expensive than stand-alone long-term care coverage, but they can be easier to qualify for if you are older (in their 60s or 70s) and aren’t in excellent health.

Like long-term care insurance, these policies will pay out once the policy holder has cognitive impairment or can’t perform two of the six activities of daily living. However, some hybrid policies operate on an indemnity model rather than a reimbursement model – which means they pay out a certain amount of cash each month rather than cover the actual cost of care. This allows the flexibility to pay a family caregiver (who typically can’t be paid through a traditional long-term care policy).

Other life insurance options

If you have an existing permanent life insurance policy and still are in relatively good health, you could convert it to a hybrid policy to add a long-term care benefit. If you already need care, you could use the cash value in a permanent life insurance policy to pay for care. You could take loans against the policy or surrender the policy entirely to get the full cash value. However, that latter option could force you to pay fees and taxes.

You also might be able to sell a permanent life insurance policy to a life settlement company if they are at least 65 years old. You won’t get the full death benefit amount but will get more than the cash surrender value. 

If you have a term life insurance policy that’s still in force, you might be able to use accelerated death benefits to pay for care if they have a life expectancy of 12 months or less. If your policy has an accelerated death benefit rider, you could get a lump-sum payment equal to a portion of the policy death benefit (typically 50% of the death benefit). 

Annuities

You could use annuities to help pay for long-term care. Annuities are products that are issued by insurance companies. They provide a guaranteed stream of income in exchange for a lump-sum payment. If you already have one of these products, you could annuitize it to start getting regular payments. Just make sure you’re past the waiting period for accessing the money in the annuity. Otherwise, you’ll have to pay a surrender charge.

There are annuities that are specifically geared toward paying for long-term care. So if you don’t qualify for long-term care insurance and have a stash of cash to invest, you could buy an annuity with a long-term care benefit. Typically, these types of annuities will pay out two to three times the initial investment.

When buying any type of long-term care insurance or annuity product, it’s best to work with an insurance broker who works with several insurance companies and can help compare plans for you. You can find a broker through the American Association for Long-Term Care.

Reverse mortgage

You might be able to use the equity in your home to pay for care. If you are 62 or older and own your home outright or have paid off most of the mortgage, you can apply for a reverse mortgage (also known as  home Equity Conversion Mortgage.

A reverse mortgage is a loan, and interest does accrue. However, you won't have to pay back more than the home is worth. And it doesn't have to be paid back while you still are living in the home—only when the house is sold or if you move out or die. There are several fees, though, associated with reverse mortgages, they can be confusing, and deceptive marketing often is used to promote these loans, according to the Consumer Financial Protection Bureau. So, a reverse mortgage should be a last resort.

Your best bet is to meet with an independent, fee-only financial advisor to review your options and come up with a plan to pay for long-term care.

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