How to Pay for Long-Term Care

By Justin Pritchard, CFP®

Long-term care (LTC) is one of the biggest unknowns in retirement planning. You can’t know whether or not you’ll face costs related to nursing home care or dementia. And if the need arises, you can’t predict how much you’ll spend or how long you’ll need care.

Still, it’s wise to plan for the worst, even if you’re expecting the best. So, let’s review how you might pay for LTC if the need arises—whether you’re planning for yourself or somebody in your family. You may have several options available, and clients often benefit from reviewing these options as they plan for retirement.

On this page:

  • Will you pay any costs?
  • How much should you expect to pay?
  • Ways to pay for care

Continue reading below, or get similar information from this video.

As we explore this topic, it’s important to acknowledge that you might have several options available, especially if you’re fortunate. But if you don’t have deep pockets or a reliable support network around you, it may still be possible to get quality care during your most vulnerable years.

What Is LTC?

Long-term care primarily refers to custodial care. While this page is more about the financial aspects, a quick refresher may be helpful.

While the term can refer to a variety of situations, it’s essentially about services that help you meet your needs when you’re unable to do everything yourself. Those services might include activities of daily living (ADLs) and more:

  • Bathing
  • Dressing
  • Grooming yourself
  • Using the toilet
  • Eating and preparing food
  • Moving around, whether you’re going from room to room or to the doctor’s office

You might be unable to do those things independently due to illness, age or frailty, cognitive decline, an injury, or other reasons. The cause doesn’t matter as much as the need for help, although cognitive decline itself can help you qualify for certain benefits. For instance, if you cannot manage your medications but can otherwise do everything you need physically, you likely need help.

Your health and safety are at risk if you don’t get assistance with critical needs.

A key word here is “long” term care. You might need short-term help after getting surgery or an injury, but those episodes often end after a few months. For LTC, we’re talking about how to pay for nursing home care or worsening dementia—typically for several years or more.

Who Provides Long-Term Care?

So, who helps you when you need it? LTC can come from several sources, including:

  • Friends and family
  • Professional services
  • Nursing or retirement homes (assisted living and memory care)
  • Volunteers and community programs
  • Adult daycare centers

Bar chart showing likelihood of needing unpaid LTC vs paid care in a nursing home or assisted living

Will You Pay for LTC? How Much?

When your needs are minor, friends and loved ones might be able to do everything at no cost. A neighbor might shovel your snow, and a spouse or child can prepare meals.

But at some point, the needs can increase. Caregivers may need more skills, knowledge, or physical strength to do everything you need. Or, maybe you don’t want to rely on unpaid caregivers.

For example, it may be unwise to expect an aging spouse to lift you out of the bathtub—you’re both potentially at risk of injury. Or maybe you don’t want your neighbor to help you bathe. Plus, as your needs progress, you may want more constant help from professionals in your everyday life.

While an LTC event can happen at any age (due to an auto accident, illness, or other events), we’ll focus primarily on retirement here. For example, it’s important to know how to pay for dementia or nursing home care as you age.

Roughly half of all retirees might not face any LTC costs. In those cases, they might not need any care. Or if they do need help, an unpaid caregiver may be involved.

Some people make do with only unpaid help. But as conditions worsen, you may need additional support. For instance, you might pay somebody to come to your home periodically (cleaning up and preparing meals), or you might go into an assisted living facility.

The cost of care depends on your location, severity of needs, and other factors. For example, paying for dementia can be among the most expensive situations. You may need 24-hour supervision, bed alarms, and locked doors in memory care. Those costs can easily reach or exceed $10,000 per month in many areas. But if you just need somebody to come and clean your home, the cost is understandably lower.

Will Medicare Pay for Long-Term Care?

But what about Medicare? Doesn’t that cover everything you need in retirement?

Medicare pays for costs like hospital expenses, rehabilitation, and medical costs. Unfortunately, it pays almost nothing for LTC.

“You pay 100% for non-covered services, including most long-term care,” according to the U.S. Centers for Medicare and Medicaid Services.

Medicare generally does not pay for custodial care. You can get some limited benefits for nursing and rehabilitation, but not for an extended LTC event, and only when you meet specific requirements. If you’re imagining dementia or a long progression of diminishing health, Medicare is not the answer for funding custodial care—but it can help with doctors and hospital expenses.

How to Pay for Long-Term Care

There are several ways to get services, and each approach has pros and cons. We’ll primarily look at how to pay for LTC without insurance, although we’ll include a few scenarios where insurance might pay.

Listing of how to pay for nursing home or dementia care: Self-fund, insurance, home equity, Medicaid, etc.

Unpaid Care

First, it’s important to explore unpaid care. In many cases, people get help from family members—including a spouse, if married. You might even plan for aging in place with friends or a “chosen family” (think along the lines of a Golden Girls scenario).

That approach is great because it doesn’t drain financial resources, and you can stay at home. A challenge is the strain it can put on caregivers. Your loved ones are probably eager to help, and they may prefer to be your caregiver instead of having strangers provide care in a facility.

But in some situations, the need for more expertise, physical strength, and 24-hour care can be overwhelming. There might be limits as to what others can do for you, and things could evolve to a point where you need outside help. Plus, what if your caregivers get sick or injured?

A loved one’s desire to help can even have consequences for the person needing care as you push those limits. For example, skin irritation and other complications could arise if somebody is incontinent and the caregiver isn’t checking in often enough (because they need to sleep through the night).

Pay Out of Assets (Self-Funding)

When you pay for services out of your assets, you can get professionals involved, and you have a high degree of control over who will (and who won’t) provide care.

At the same time, the costs can be unpredictable and substantial. Many people won’t have the resources to cover a significant LTC event. If you just need somebody to help around the house a few times per week, that’s one thing. But if demands rise, the costs can increase as well.

When evaluating this option, look at costs of care in your area. Then, factor in inflation to prepare for potential future costs, and remember that health care costs have tended to rise more quickly than other costs.

When working with clients, I estimate an amount based on assumptions about their location and health. Of course, you’ll never predict the future accurately, but you need to start somewhere. Then, look at whether or not you expect to have assets available at the end of life.

Is it Realistic to Self-Fund?

It’s important to ask yourself if you want to reserve significant assets. By keeping a large cushion set aside, you might significantly reduce your retirement spending. We’re talking hundreds of thousands of dollars in today’s dollars. If that doesn’t appeal to you or if it’s just not realistic, several of the alternatives below might make more sense.

What Happens When Assets Run Out?

There’s also the question of what happens when you run out of money. If you’ve been paying for care in an assisted living facility, will they kick you out? This gets very complicated, and the details depend on where you are when you run out of money, your state, your health, and other factors.

It is possible to get evicted from an assisted living facility when you run out of money. You would generally go on Medicaid, but you may need to relocate to a nursing home with different amenities for those benefits. That said, it may be possible to stay where you are if you meet specific requirements. Consider starting in assisted living facilities that have contracts with Medicare if you want to improve the chances of staying put when assets run dry.

LTC Insurance

Insurance specifically designed for LTC can certainly be helpful and provide substantial resources if you need care. However, coverage can be expensive and complicated.

We’re not going to dive deep into LTC insurance here. You probably already know it’s an option for paying for LTC. But if the concept is new to you, it’s worth researching more and exploring the pros and cons.

Some people suggest rules of thumb for LTC insurance. They say if you’re below a certain level of assets, paying for LTC insurance isn’t your best option—they’d suggest spending down assets and going on Medicaid instead. But if you’re above a certain asset threshold, the rules of thumb suggest that you don’t need LTC insurance because you have enough to self-fund. Only those who fall in between those asset levels would be candidates for coverage, according to these rules of thumb (that is not necessarily my view, though).

That said, rules of thumb are always imperfect. While there may be some sensible rationale behind them, a detailed and individual analysis is always best. You might have objectives that differ from what rules of thumb are based on, and opting for or against insurance really depends on your specifics. You might also want to consider asset levels that are different—whether higher or lower. Again, your specifics matter.

State LTC Partnerships

One reason to consider LTC is if you have goals to pass assets on to others. When you buy certain forms of LTC insurance, you might be able to preserve some assets if you go on Medicaid. Look into state LTC partnership programs for more information.

Home Equity

There are at least two ways to put equity in your home to work:

  • Reverse mortgages
  • Downsizing

A reverse mortgage enables you to access your home equity for anything you need, including LTC expenses.

For this option to work, you need to have sufficient equity in your home, and you need to meet specific requirements. Plus, it’s important to consider what happens with your home in the future. Do others live there, or do you intend to pass the property on to loved ones? If so, you’ll need to think about all of that.

You can also tap home equity through downsizing or relocating. When your health declines, that might be an excellent time to simplify life, perhaps favoring single-level residences that you don’t need to maintain yourself. You can even explore buying into certain communities with your home equity—again, that is an extremely complex topic for a different article.

When working with clients, we often look at their home equity and make some assumptions about how the property might change in value. Then, they decide what’s the purpose of that equity—is it a safety net for LTC costs, do they want to pass it on to somebody else, or are there other goals? Those funds can provide a substantial cash injection to some financial plans.

Life Insurance

If you have permanent life insurance, you might be able to use funds from a policy for certain expenses. One option is to use the cash value through loans or withdrawals, but it’s critical to review those strategies with an insurance expert and your CPA before doing anything. You can potentially reduce or lose your coverage, and you may face tax consequences when dipping into your cash value.

You might also have early access to a life insurance death benefit. If your policy offers an accelerated death benefit and you’re terminally ill (or you otherwise qualify), you can potentially get money out tax-free. However, doing so reduces the death benefit.

As always, there are pros and cons, so you need to discuss this with several experts before taking any action. Those funds can cause you to lose eligibility for Medicaid or other programs, for example, and there are other complications.

Of course, to use this option, you need life insurance in place. So, this option may only be feasible for those with existing policies that they don’t need for other purposes.

Medicaid

Medicaid is a needs-based safety net that can help when you have limited assets and income. If paying for long-term care drains your resources, you would likely go on Medicaid. Then, you could receive custodial care, medical care, and other services at a minimal cost (or potentially at no cost).

To qualify for the most generous benefits, you need to meet requirements that vary from state to state, so it’s wise to research those programs for the area you plan to retire in. In general, expect to have little or no income and assets other than a primary residence and some personal belongings—but verify with a local expert before assuming anything.

Medicaid gets a bad rap, and it might not be your first choice—after all, it’s always helpful to have assets and numerous alternatives available—but using Medicaid is not necessarily disastrous. It’s the only option for many people, and as with other areas of healthcare, your care often depends on specifics like where you are and who is on shift when you need care.

That said, Medicaid can have rigid rules, and it may take several months to get approved for Medicaid. Note that LTC programs can be separate from basic Medicaid, so start the process of checking all the boxes long before the actual need arises.

Also, get familiar with Medicaid’s lookback rules. It may be tempting to give funds away quickly so you qualify for Medicaid, but doing so may have consequences. They generally look back five years, and there could be penalties for any transfers you make in the five years before going on Medicaid. An elder law attorney or Medicaid expert can help you understand the rules.