How to Pay for Long-term Care
For many seniors and their families, the high costs associated with long-term care are a major concern. The U.S. Department of Health and Human Services (HHS) estimates that the average person turning 65 today will incur approximately $138,000 in future long-term care costs although it is important to note that costs vary greatly depending on the type and duration of care required.
There are a variety of resources available to seniors who require assistance paying for long-term care. After reading this guide, you will have a better understanding of the options for paying for long-term care and which financing strategy may be most appropriate for you and your family.
According to the Centers for Medicare and Medicaid Services (CMS), more than 70% of people aged 65 and older will require long-term care services and supports at some stage in their lives.
“Long-term care” is a broad term used to describe a variety of services and supports designed to assist elderly and/or disabled individuals with their personal care needs and the activities of daily living (ADLs) which include eating, dressing, bathing, toileting, and mobilizing. There are a variety of long-term care options available ranging from periodic in-home visits to round-the-clock nursing home care.
The type of long-term care a senior requires and their individual care needs and preferences may affect the type of financial product(s) and/or program(s) they choose to utilize. In addition, some options are only available to seniors who meet certain health and/or financial eligibility requirements.
Seniors can get a better sense for how much they can expect to spend on long-term care using this online long-term care calculator by the American Association of Retired Persons (AARP).
Paying Out-Of-Pocket For Long-Term Care
Most seniors cover some of the cost of their long-term care using personal funds (paying out-of-pocket), at least to begin with. On average, seniors and their families cover about half the cost of long-term care using their own money, while the other half is covered by public programs and/or private insurance plans.
According to a recent study conducted by the Economic Policy Institute (EPI), the median amount of dedicated retirement savings held by all American families is just $5,000 and many families have nothing saved. This number rises to $60,000 when families with zero savings are excluded.
There are two common types of retirement savings accounts which may be used to pay for long-term care: individual retirement accounts (IRAs) and employer-sponsored defined contribution retirement plans.
IRA options include:
- Traditional IRAs
- Roth IRAs
- Simplified employee pension (SEP) IRAs
- Savings incentive match plan for employees (SIMPLE) IRAs
Defined contribution retirement plan options include:
Seniors may also pay for long-term care using savings from traditional savings accounts and/or certificates of deposit (CD)s. Over 35% of seniors consider traditional savings accounts and CDs to be a minor or secondary source of retirement funding; however, about 8% of seniors consider these accounts to be their primary source.
Social Security, Pensions, And Other Retirement Income
Seniors may also use their Social Security income and/or any pensions they may have to help cover the costs of long-term care services they require.
Although the average beneficiary does not receive enough Social Security income to pay for all long-term care needs, it remains the primary source of income for older Americans, and is therefore often used to help pay for long-term care. The average Social Security beneficiary received $14,229 from the Social Security Administration (SSA) in 2012.
Approximately 46% of Americans aged 65 and older also receive pension income from a former employer (or a spouse’s former employer) and this income may also be used to pay for long-term care. Other retirement income such as income from stocks, bonds, mutual funds, and other sources may also be used.
A benefit to using personal funds to pay for long-term care is that this method of payment may be used to fund any type of long-term care that an individual and their family members deem necessary or appropriate.
Public Programs That Pay For Long-Term Care
While some seniors are able to cover the entire cost of long-term care out-of-pocket, most seniors are only able to cover a portion of these costs themselves and many seniors eventually require assistance from public programs and/or private funding sources.
Medicaid is a government program that helps people with limited income and resources pay for health care services as well as some non-medical (custodial) care. Medicaid receives funding at both the state and federal levels and the program is overseen by the federal government, but is managed and administered at the state level.
Many people incorrectly assume that Medicare and Medicaid cover the same basic services; however, this is not the case. While both programs cover a variety of medical expenses, Medicare does not cover long-term custodial care when that is the only type of care required.
Medicaid, however, covers a variety of long-term care services and supports including personal and custodial care delivered in long-term care facilities as well as care delivered in beneficiaries’ homes.
It is worth noting that Medicare may cover certain medical-related expenses such as skilled-nursing services, prescription drug coverage, and hospice care for those who also require long-term care services. However, Medicare will not cover day-to-day custodial care costs.
In order to qualify for Medicaid coverage, individuals must meet both general and financial eligibility requirements. However, just because a senior qualifies for Medicaid coverage does not mean that they are automatically eligible to receive funding for long-term care services. Additional functional eligibility requirements must be met before Medicaid will cover long-term care.
It is important to note that since Medicaid is managed by the states, each state has slightly different eligibility rules and coverage varies from state to state. Nevertheless, all states require beneficiaries to have limited income and resources in order to qualify. Seniors who do not currently qualify may become eligible in the future as their resources are depleted.
In certain states, elderly individuals whose income exceeds the income eligibility requirements may still qualify for Medicaid on the basis of being “medically needy.” In such cases, a senior’s medical expenses are subtracted from their income when eligibility is assessed. However, the senior’s net assets must still be low enough to meet Medicaid’s financial eligibility requirements in their state of residence in order to qualify.
For more information on Medicaid, eligibility requirements, and how to apply for coverage, please see our comprehensive overview of Medicaid for long-term care.
Program Of All-Inclusive Care For The Elderly
In addition to Medicaid, some states operate a Medicare and Medicaid program called the Programs of All-Inclusive Care for the Elderly (PACE). PACE is designed to help prevent seniors from having to enter a nursing home or other costly long term care facility by providing the resources necessary for individuals to receive the care they need in their homes or in the community on an outpatient basis.
In order to qualify for PACE, applicants must meet the following criteria:
- They must be aged 55 or older.
- They must live within the service area of a PACE organization.
- The state must certify that an applicant requires a nursing home level of care.
- They must be able to live safely in the community with PACE’s assistance.
PACE provides a wide range of custodial and medical care services to enrollees including but not limited to the following:
- In-home care
- Emergency services and hospital care
- Nursing home care
- Adult day care
- Physical, occupational, and speech therapy
- Nutritional counseling
- Specialized medical care
Seniors may determine if their state operates a PACE program by clicking on the link provided here.
Elderly or disabled wartime veterans who meet certain financial eligibility requirements may qualify for the tax-free Veterans Pension benefit program.
In addition, seniors who have served in the armed forces (or in some cases, those whose spouse has served in the armed forces) may be eligible to receive assistance paying for long-term care through another U.S. Department of Veterans Affairs (VA) program called the Aid and Attendance (A&A) benefit.
The A&A benefit is added on to qualifying veterans’ existing pensions. In addition to meeting the Veterans Pension eligibility requirements, veterans must meet one or more of the following criteria in order to qualify for the A&A benefit:
- They require assistance with ADLs.
- They are bedridden.
- They are a patient in a nursing home.
- Their eyesight is limited to a corrected 5/200 visual acuity or less in both eyes or concentric contraction of the visual field to 5 degrees or fewer.
According to the Center for Elder Veterans Rights, the VA will provide qualifying veterans and/or their spouses with the following per-month maximum amounts, which include the Veterans Pension benefit plus the A&A benefit:
- Single veteran: $1,788
- Married veteran: $2,120
- Veteran couple: $2,837
- Surviving spouse: $1,148
For more information on the VA’s A&A benefit program, eligibility requirements, and how to apply for this program, please see our comprehensive overview of the A&A benefit.
Private Financing Options To Pay For Long-Term Care
In addition to personal funds and public programs like Medicaid, there are a variety of private financing options available to seniors looking to maximize their savings or use home equity to help with long term care. The private financing option that is right for a particular senior will depend on a number of factors including their age, living situation, health status, homeownership status, and personal finances.
Long-Term Care Insurance
Many people assume that Medicare and private health insurance plans cover the cost of long-term care; however, this is not usually true. Medicare and most private health insurance plans will only cover care that is skilled, short-term, and medically necessary. Because of this, some seniors decide to purchase long-term care coverage to help cover some or all of the costs of long term care.
Unlike Medicare and traditional health insurance, long-term care insurance covers personal and custodial care in a variety of settings including seniors’ homes, assisted living facilities (ALFs), memory care units, nursing homes, adult day care centers and other long-term care facilities.
Long-term care coverage insurers reimburse policyholders up to a certain amount per day and seniors may choose from a range of care options and benefits.
The cost of a long-term care insurance policy is dependent on a number of factors including:
- The insurer the individual purchases the policy from.
- The individual’s age at the time they purchase the policy.
- The maximum amount the policy will pay per day.
- The maximum number of years the policy will pay for care.
- Any optional benefits the individual chooses to add on.
It is also important to note that seniors who are in poor health or who are already receiving long-term care may not qualify for long-term care insurance.
According to a study done by the Urban Institute, only about 11% of Americans aged 65 and older had long-term care insurance in 2014. Most seniors rely on other sources of funding to pay for long-term care.
For more information on long-term care insurance and how it may be used to help cover the cost of long-term care, please see our comprehensive overview of long-term care insurance.
Using Life Insurance To Pay For Long-Term Care
In some situations, seniors may be able to use a life insurance policy to help pay for the cost of long-term care. There are four ways this may be done through:
- Combination (life/long-term care insurance) products
- Accelerated death benefits (ADBs)
- Life settlements
- Viatical settlements
Some insurance companies offer combination life insurance and long-term care insurance policies. The idea behind these products is that policyholders can be confident that benefits will be paid one way or another whether they end up requiring long-term care services or not.
Accelerated Death Benefits
ABDs may be added to certain life insurance policies, often for an additional premium. ADBs allow policyholders to receive a tax-free cash advance on their death benefit while they are still living under certain circumstances which may include:
- They are terminally ill.
- They have a life-threatening illness.
- They require long-term care services for an extended period of time.
- They are a permanent resident at a nursing home and require assistance with ADLs.
Some life insurance companies allow policyholders to sell a policy for its present value, for any reason, in exchange for cash. The proceeds of the sale may be used to pay for long-term care costs. Life settlement options are generally only offered to seniors above a certain age; women age 74 and older and men age 70 and older. It is also important to note that the proceeds of such a transaction may be subject to taxation.
Viatical settlements are like life settlements but are only available to policyholders who have been diagnosed with a terminal illness. Unlike life settlements, which are taxed, the cash an individual receives from a viatical settlement is tax-free if they are chronically ill or have a life expectancy of two years or less.
With viatical settlements, a third party (a viatical company) pays the policyholder a percentage of their death benefit; the percentage paid is dependent on the policyholder’s life expectancy.
Ownership of the policy is transferred to the viatical company and they become responsible for premium payments. The viatical company then receives the full death benefit when the original policyholder dies. The policyholder may use the cash they receive from a viatical settlement to pay for long-term care, medical services, or other expenses.
For more information on how life insurance policies may be used to help cover the cost of long-term care, please see our comprehensive overview of life insurance for long-term care.
Using Home Equity To Pay For Long-Term Care
Many seniors have significant wealth tied up in their homes. A recent study by Zillow found that 77.6% of homeowners age 85 and older and 62.7% of homeowners age 74 to 84 owned their homes outright.
In many cases, seniors can leverage equity in their home to help cover some or all of the costs of qualified long-term care. This can be done using reverse mortgages, traditional (fixed-rate) home equity loans, home equity lines of credit (HELOCs), or by selling or renting out the home.
Reverse mortgages allow seniors to borrow money against the value of their homes without having to sell the property or move out. The primary advantage of a reverse mortgage compared to other home equity financing options is that the borrower is not required to repay the loan until they sell the home, permanently move out, or pass away.
In order to qualify for a HECM reverse mortgage, homeowners must meet the following eligibility requirements:
- They must be 62 years or older.
- They must own the home outright or have a low balance left on their first mortgage.
- They must use the home as their primary residence.
- They must have good credit and be financially stable enough to continue making timely payments on homeowners insurance, property taxes, and homeowners association (HOA) fees.
The Department of Housing and Urban Development (HUD) also requires homeowners who acquire a HECM reverse mortgage to participate in a consumer information session covering additional options. These presentations must be administered by a HUD-approved HECM counselor such as AARP.
The money from reverse mortgages may be paid to the homeowner as a lump-sum payment or in fixed monthly installments and homeowners are not required to pay interest on the money they receive.
Reverse mortgages may be a good financing option for seniors receiving long-term care in their own homes or at an adult day care center. However, due to the requirement that homeowners must continue to live in their home, reverse mortgages may not be the most appropriate option for seniors receiving qualified long-term care in a facility setting such as an ALF or nursing home.
The exception to this rule is if the senior receiving care has a spouse/partner or other family members who has signed on the reverse mortgage as a co-borrower. In such cases, the senior may be able to move into a residential long-term care facility and not have their loan become due as long as the co-borrower continues living in the home as their primary residence.
One of the significant advantages of a reverse mortgage over other home equity financing options is that homeowners are not required to pay back the loan during their lifetime. However, a drawback of reverse mortgages is that the fees and other associated costs are often higher than those of traditional fixed-rate home equity loans and HELOCs.
For seniors who are currently receiving Medicaid benefits--or those who expect to become eligible in the future--it is important to consider how obtaining a reverse mortgage may impact Medicaid eligibility. While the value of a senior’s primary residence is excluded from net assets for Medicaid eligibility purposes, money received from a reverse mortgage may affect financial eligibility for Medicaid.
Traditional Home Equity Loans
Traditional home equity loans and HELOCs are often referred to as “second mortgages” because they operate much like traditional (ie. first) mortgages.
Home equity loans allow homeowners to borrow a lump sum of money against the value of their home which may be used to pay for long-term care planning. Borrowers then repay the loan in equal monthly installments. Interest rates on home equity loans are usually fixed.
The amount a senior can borrow with a home equity loan is dependent on a number of factors including:
- The amount of home equity - According to the Federal Trade Commission (FTC), most insurers limit loan amounts to 85% of the borrower’s home equity.
- The market value of the home.
- The borrower’s income and credit history.
As with reverse mortgages, seniors looking to pay for long-term care using a traditional fixed-rate home equity loan should consider the potential impact on their Medicaid eligibility in their state of residence.
Home Equity Lines Of Credit
HELOCs operate much like a credit card; as long as the borrower does not exceed their credit limit, they may borrow as much or as little as they need whenever they want. Borrowers are only required to make payments on the amount they actually borrow, not on the full amount of the loan, and once the principal is paid, the credit revolves and the borrower may borrow from it again.
The entire amount of the loan does not become due until the HELOC expires when the house is sold.
The amount that can be borrowed using a HELOC depends on factors similar to those that determine the loan amount of traditional home equity loans. Like traditional home equity loans, HELOC loan amounts typically cannot exceed 85% of a borrower’s home equity and insurers usually require homeowners to have good credit and a steady income.
Unlike traditional home equity loans which have fixed interest rates, interest rates on HELOCs are variable and fluctuate throughout the life of the loan. HELOCs may be accessed using specially-issued checks or a linked credit card.
Another factor to consider is that, while reverse mortgages decrease borrowers’ home equity, traditional home equity loans and HELOCs allow them to maintain their current level of home equity.
Like with other forms of home equity financing, It is important for seniors to evaluate how using a HELOC to pay for long-term care may impact their Medicaid eligibility in their state of residence.
Selling A Home
Another option available to seniors looking to use the value of their home to cover some or all of the costs of long-term care is to sell the home outright and use the proceeds of the sale to pay for care or rent out the home and use the rental income to pay for care.
Unlike a reverse mortgage which requires seniors to continue living in their homes, these options may be most appropriate for elderly individuals who are currently receiving long-term care in an ALF, nursing home, or another residential facility.
Selling a home may be a difficult decision particularly if the home has been in a person’s family for many years. In addition, the process of preparing a home to sell, putting it on the market, and finding a buyer may require substantial investments of time, money, and effort.
Some factors seniors and their families may want to consider when deciding if selling a home is a good option include:
- Whether or not the homeowner or family member(s) want to continue living in the home or want to return to the home sometime in the future.
- The possibility that the property may increase in value over time.
- The cost of renovations, repairs, real estate fees, and other costs associated with selling the home.
- The contents of the home (furniture, clothing, personal possessions, etc.).
- Potential taxes owing on the sale of the home. If profits from the sale exceed a certain amount ($250,000 for an individual or $500,000 for a married couple), capital gains tax may apply.
Depending on the home and its geographic location, the proceeds from the sale of a home may be used to pay for a substantial portion of an individual’s long-term care. In some cases, the proceeds from the sale of a home may be able to pay for all of a person’s long-term care planning.
In 2017, the average home in the U.S. sold for $289,200. As noted earlier, the average American turning 65 years old today can expect to incur approximately $138,000 in long-term care costs during their lifetime. It is important to keep in mind the variable costs of different types and levels of care as well as the fees and expenses associated with selling a home.
Renting Out A Home
If selling one’s home is not an option or an individual wishes to maintain ownership of their home, another option is to rent out the home and use the rental income to pay for long-term care. The feasibility of this option is dependent on the home’s geographic location, rentability, and the home’s ability to produce sufficient income.
Renting out a home can be a major undertaking and often requires substantial and/or ongoing investments of time, money, and resources. If a senior requires long-term care, they may be unable to find renters and manage and maintain the property themselves.
In some cases, a family member or spouse/partner may be able to manage the property or it may be necessary to hire a professional property manager or property management firm. In the U.S., the average property manager charges between 4% and 10% of a property’s monthly rental income. For single family homes, the fee tends to be on the higher end of this range.
For more information on how to leverage the value of a home to pay for long-term care using reverse mortgages, traditional fixed-rate home equity loans, HELOCs, or by selling or renting out a home, please see our comprehensive overview of home equity and long-term care.
Using Immediate Annuities To Pay For Long-Term Care
Due to the high cost of long-term care, potential hospitalizations, and other medical expenses associated with the aging process, many seniors have concerns about outliving their savings and running out of money.
Immediate annuities (sometimes also called income annuities, single-premium immediate annuities (SPIAs), or payout annuities) may help address these concerns and provide seniors with peace of mind and financial security through guaranteed monthly payments.
SPIAs are annuity products that may be purchased from insurance companies that offer investors lifelong fixed-monthly payments in exchange for an initial, upfront lump sum of cash (called the premium). The longer the purchaser lives, the better the deal is for the purchaser financially.
Depending on the amount of the initial lump sum and the monthly payments, SPIAs may be used to pay the entire cost of long-term care. SPIAs may also be used to supplement other sources of retirement income such as Social Security, pension payments, income from assets, etc.
The monthly payment amount that an individual may receive from a SPIA is dependent on a number of factors such as:
- The amount of the initial lump-sum investment.
- The interest rates at the time of the investment.
- The purchaser’s age and gender.
- Whether or not the purchaser has been diagnosed with a serious medical condition.
In most cases, the older a purchaser is when they buy a SPIA, and the more money they invest, the higher their monthly payment amount will be. Since women tend to live longer than men, monthly payment amounts to women are usually slightly lower than the amounts paid to men.
Couples may also purchase what is known as a “joint and survivor” SPIA if they would like payments to continue until both spouses/partners have passed away.
- Alzheimer's disease
- Specific cancers
- Vascular disease
- Congestive heart failure (CHF)
- Previous heart attack
- High blood pressure
- Parkinson’s disease
- Other specific health conditions
In order to qualify for a medically underwritten SPIA, an insurance company must determine that an individual’s life expectancy is lower than that of the average person their age.
Those who qualify for a medically underwritten SPIA may expect to receive significantly higher monthly payments--often 25% to 30% higher--than they would receive with a traditional SPIA.
For more information on immediate annuities and how they may be used to help cover some or all of the costs of long-term care, please see our comprehensive overview of immediate annuities.
FAQs About How To Pay For Long-Term Care
1. What type of long-term care financing is right for me and my family?
The payment option(s) that is right for you will likely depend on a number of factors including:
- Whether or not you own a home and the amount of home equity you have.
- Your living situation and/or family situation.
- Your financial situation.
- Whether or not you qualify for Medicaid and/or other government programs.
- Your health.
- The type of care, level of care, and specific services you require.
- Whether or not you have purchased long-term care insurance and/or a life-insurance policy.
- Whether or not you are a veteran and qualify for the A&A benefit.
You may be able to discuss funding options with the administrative staff at an ALF, nursing home, or other long-term care facility or provider in order to better understand the financing options available and which one may be right for you.
2. Can I use a combination of financing options?
Yes. In fact, the majority of individuals who require long-term care services and supports use a combination of the financing options covered in this guide. According to HHS, most people cover approximately half of their long-term care costs using personal funds and retirement income, while the other half is covered by public programs such as Medicaid and/or private insurance plans.
3. How do I know what type of care is appropriate for my father and our family members?
The type of care that is right for your father will likely depend on a number of factors including:
- His living situation and whether or not he has a spouse/partner, adult child, or other caregiver that is able to assist him with some of his care needs. If he has someone living with him who can help him with his care needs, in-home care and/or adult day care may be a good option.
- Whether or not he has advanced Alzheimer’s disease or another form of dementia, in which case he may require specialized services such as those provided in memory care settings.
- Whether or not he requires skilled nursing services or other ongoing medical assistance in addition to custodial care.
Seniors and their families who are unsure whether or not they require long-term care services and what type/level of care may be most appropriate for them may consider consulting their primary care physician or another doctor to get a better sense of their care needs and options.
In addition, for more information on long-term care and the various options available, please see our guide on options for long-term care for seniors.