People who plan for their golden years may focus on funding the travel, hobbies and family time they hope will fill their early retirement. Fewer realize the full financial impact of those later years when they may need more hands-on help. That’s why it’s smart to educate yourself about long-term care and think about how you might pay for it, either now or in the future. The U.S. Department of Health and Human Services states that someone turning 65 has a nearly 70% chance of needing some type of long-term care services and supports in their remaining years.
Long-term care includes any kind of service you might need to help with your daily care over an extended period of time. That could include staying at a nursing home or assisted living facility or having an at-home aide to help with basic needs, like bathing, eating, dressing and taking medication.
Standard health insurance policies do not cover most long-term care. And long-term care isn’t cheap: The 2019 Genworth Cost of Care Survey found that the national median cost of a semi-private room at a nursing home is over $90,000 per year. An assisted living facility costs $48,612, and a home health aide costs almost $52,620. Those aren’t static costs, either: Each is projected to climb between 3 and 4 percent each year.
If you or a loved one are facing a potentially extended period of need without a bottomless bank account, here are some options to consider.
This program is designed to help low-income families with both acute and long-term care. Medicaid is by far the largest source of long-term care funding: 21% of all Medicaid funding went toward long-term care costs in 2019, and in 2017, when the latest data was gathered, 62% of nursing home costs are paid for by Medicaid.
Though the federal government provides some funding, states run the program, which means eligibility requirements and what’s covered can vary considerably by location.
To qualify for Medicaid, in general, your monthly income cannot be greater than $2,349 (or $28,188 annually). And in most states, the value of your financial assets cannot exceed $2,000 (although the range for 2020 is between $1,600 and $15,750). There are certain exceptions though, and some assets (such as a home and vehicle) aren’t included in those asset limits when considering eligibility. For many people of modest means, qualifying for Medicaid involves a spend-down strategy in order to meet financial eligibility.
If you do qualify, Medicaid may cover:
- Nursing homes. Under federal law, all state Medicaid programs are required to cover this cost if needed, though state officials decide how much to pay facilities.
- Assisted living. As of 2019, 44 states and Washington, D.C. provide some level of financial assistance for assisted living, though it may go by many other names, including adult foster care, residential care and supported care.
- Home-based or community-based services. These are typically reserved for people who would otherwise require a nursing home if services weren’t provided at home. Coverage can range from personal care (bathing, feeding, dressing) to nursing services (medication administration, blood pressure monitoring) to chore and homemaker services (cleaning and cooking).
Medicare does not cover most long-term care, including long-term nursing home care, non-medical in-home care, adult day care or most assisted living facilities (what the program dubs “custodial care”). Instead, you may be able to get Medicare coverage for:
- Skilled nursing facilities, following a hospital stay of at least three days. At the skilled nursing facility, days 1-20 are covered in full, while days 21 through 100 require a copay. After 100 days, you pay for all costs.
- Doctor-prescribed home health services, such as physical or occupational therapy (but not personal care, such as bathing or feeding)
- Medical supplies, including hospital beds, walkers, wheelchairs, blood sugar monitors and oxygen
- Hospice care, including respite care for loved ones. Note that once Medicare starts covering hospice care, it will no longer pay for hospital costs or treatments or prescriptions intended to cure your illness.
3. Health savings accounts
Health savings accounts, or HSAs, have become more common in recent years. They allow people with high-deductible insurance plans to save pre-tax dollars for future medical expenses — even if the money isn’t spent for years or decades in the future, says Ralph Barringer, CFP, a certified long-term care consultant and financial planner at Northwestern Mutual in Louisville, Kentucky.
You’re allowed to spend HSA funds on any IRS-approved medical expense for yourself, a spouse or a dependent (including a parent, if he or she is a legal dependent). That includes medical equipment, like wheelchairs and walkers, as well as copays for appointments.
In addition, you can use your HSA funds on long-term care, if a licensed doctor certifies that either:
- The individual is unable to perform at least two activities of daily living (such as bathing and dressing oneself) without substantial assistance from another individual for at least 90 days.
- The individual has cognitive impairment that poses a threat to his or her health or safety and requires substantial supervision.
If you meet those requirements, you’re allowed to spend your HSA savings on:
- Nursing services, such as administering medication or changing dressings. This could be provided in your home or another care facility.
- Personal care, such as bathing, dressing, feeding and assisting with toileting or incontinence.
- Therapeutic services, such as physical therapy or occupational therapy.
4. Veterans long-term care benefits
Home and community-based services (defined as adult day care, respite care and skilled home health care) are available to all veterans enrolled in VA health care, provided there is a clinical need and services are available in your location. There are no financial eligibility requirements.
If you are eligible for or receiving a VA Pension benefit, there are two additional programs that can help defray the cost of long term care by increasing your monthly pension amount:
- Aid and Attendance (A&A) for those who need assistance performing personal care, are partially bedridden, are in a nursing home or have limited eyesight.
- Housebound for those who are substantially confined to their home because of a permanent disability.
When it comes to residential options, the VA runs its own nursing homes, known as community living centers, and also contracts with outside nursing homes to care for veterans. Eligibility requirements vary and are based on your service connected status, level of disability, and income. The VA does not pay for assisted living, though it may cover some extra services (such as nursing care) at the facility.
It’s worth noting that space can be extremely limited, and meeting basic eligibility isn’t a guarantee of getting a bed. Also, income limitations differ not just by state but by local area. Your VA social worker is a good starting point for assessing benefits.
5. Reverse mortgage
For many people, equity they’ve built up in their home is the largest asset they have. Luckily for seniors intent on staying in their homes, moving isn’t the only way to leverage that equity. A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), allows you to take out a cash loan using your house as collateral. To qualify, you must be 62 years old or older and either own your house outright or have a low remaining mortgage balance. You do not have to repay the loan until you move, sell the house, or die.
The loan can be paid out in monthly installments or as one lump sum. The borrower can then spend it however they like, including long-term care costs or home modifications to make aging at home more feasible. The loan is due in full once the borrower has stopped living in the home for a full year or when they die. (Married couples typically sign the reverse mortgage together, so repayment is due upon the surviving spouse’s death or move-out anniversary.)
Pros of a reverse mortgage
- A reverse mortgage can be an appealing alternative to downsizing, because it allows you to tap home equity without having to leave your home.
- Even if the housing market dips, you’ll never owe more than what your home is worth (this is called a “nonrecourse” loan).
- Because the money you get is a loan, you won’t be taxed on it
- The loan does not affect your income or assets for things like Medicaid eligibility or Supplemental Security Income eligibility.
Cons of a reverse mortgage
- Reverse mortgages have been criticized for their high closing costs and interest rates that tend to hover 1 percent or more above traditional mortgages.
- They can also have complex terms, so you’ll want to make sure you understand all scenarios before you sign any paperwork.
- Downsizing to a smaller home may make more sense, if you worry about paying property taxes and utility bills or if the home’s upkeep or layout become more challenging as you age.
If you’re interested in a reverse mortgage, you can find a Federal Housing Administration–approved HECM counselor or lender at hud.gov.
6. Home equity loan
Also known as a home equity line of credit and abbreviated as HELOC, this is another way to leverage your home’s equity, but with a very different structure.
The bank issues you a set line of credit against the equity of your home, and you begin making repayments immediately. Because you can typically repay and borrow against the line of credit as often as you like, these loans are especially appealing for short-term needs. (Monthly payments are based only on how much you’ve drawn from the available line of credit at that time.)
Pros of a home equity loan
- Unlike a reverse mortgage, which requires the borrower or spouse to be living in the home, there’s no residency requirement with a home equity loan.
- Lower fees and interest rates than reverse mortgages, in general. There are also no mortgage closing costs.
Cons of a home equity loan
- You’ll begin remaking payments immediately. And if you’re unable to make payments at any time, you could risk foreclosure.
- There are fewer consumer protections with a home equity loan than a reverse mortgage. For instance, states vary on whether a home equity loan is a recourse or nonrecourse loan. In some areas, it’s possible to owe more in the loan than your home is worth if property values dip after you’ve borrowed money.
- Credit scores and credit history are big factors in eligibility, so not all borrowers will be approved or get favorable terms.
- As with a reverse mortgage, downsizing may make more sense if upkeep and expenses become overwhelming.
7. Long-term care insurance
Think of this as similar to traditional health insurance, but rather than covering the costs of an acute medical condition, long-term care insurance helps offset or cover the cost of routine care you’ll need on a daily basis over an extended period of time (such as bathing, dressing and feeding).
You’ll pay regular premiums, which can run several thousands of dollars a year and can vary each year. For traditional policies, if you never need care that money’s gone for good. With a hybrid plan, which combines permanent/whole life insurance and long-term care insurance, any unused funds become a death benefit for future heirs.
Long-term care insurance does not make sense for everyone—and you can find financial advisors who are passionately for and against this type of insurance. The first thing to know is that you won’t qualify if you already have a debilitating condition, says Barringer. For that reason, most people seek coverage in their mid-50s to mid-60s. To apply, you’ll have to fill out an application, answer questions about your medical history and possibly submit to a medical exam.
What long-term care insurance covers
What each policy covers can vary considerably, and higher premiums typically come with greater coverage. In general, long insurance kicks in when you can’t do two or more “activities of daily living” (ADLs) on your own, or if you suffer from dementia or other cognitive impairment. ADLs include bathing, dressing, eating, toileting and getting in and out of bed unassisted.
Under most policies, you’ll need to pay for service out of pocket for a set period of time. This is called the elimination period and can last from 30 to 90 days or more. Then, most policies pay up to a daily limit for care until you reach a lifetime maximum. Depending on the policy, that care may include:
- Nursing homes.
- Assisted living facilities.
- Adult day care.
- Home care.
- Home modification, such as adding handrails in the bathroom or a chair lift on the stairwell.
But policies and coverage can vary considerably, and it’s hard to predict which types of services you may need in the future. As Barringer says, “This isn’t a boilerplate-type situation, and everybody needs to work it out for themselves.”