Millions of older adults and individuals with disabilities need help with daily activities, yet many people misunderstand who pays for this care and how much it can cost.
According to LongTermCare.gov, approximately 70% of people turning 65 today will need long-term care services at some point. Women generally need care longer (3.7 years) than men (2.2 years), and about 20% of individuals will need care for over five years.
Many Americans wrongly believe Medicare will cover long-term care costs. A recent KFF survey found that nearly one in four adults mistakenly think Medicare will pay for nursing home care, while 45% of adults 65+ believe this as well. However, Medicare and most health insurance, including Medigap, don’t cover custodial care like help with daily activities if it’s the only needed service. Medicaid covers more than 60% of long-term care residents, but it has strict financial eligibility rules, varying by state.
Key Distinctions: Medicare vs. Medicaid
If Medicaid isn’t an option, here are alternative funding strategies:
Health Savings Account (HSA): For those with high-deductible health plans, HSAs allow tax-deductible contributions and tax-free growth. Withdrawals for eligible medical expenses, including some long-term care insurance premiums, are also tax-free.
Long-Term Care Insurance (LTCI): LTCI can provide financial support if you can’t perform two or more activities of daily living (ADLs) or if you have cognitive impairment. Many people purchase LTCI in their 50s or 60s. Premiums, however, can be high and may increase over time, so it’s important to assess affordability over the long term.
Long-Term Care Annuities: These annuities are funded by a lump sum or regular payments, providing benefits specifically for long-term care. If unused, the remaining funds go to you or your heirs. This option is more accessible for those with pre-existing conditions but can be complex.
Self-Funding: For those with significant savings, paying out-of-pocket may be possible. However, long-term care costs are high; for instance, Genworth reports the 2023 median costs for assisted living at $64,200 annually, and a private nursing home room at $116,800. Costs like these can quickly deplete assets, making Medicaid a potential last resort.
Roth IRA: A Roth IRA allows for tax-free withdrawals after age 59½, provided the account has been open at least five years. With no required minimum distributions, it can serve as a flexible long-term care funding source.
Home Equity Options: Reverse mortgages and HELOCs (Home Equity Lines of Credit) can unlock home equity. With a reverse mortgage, you receive payments based on your home’s value, which are repaid only when you leave the home. A HELOC, on the other hand, requires monthly payments, but failure to pay could result in foreclosure. Home equity options allow for additional cash flow, but they should be used carefully and ideally with professional guidance.
Long-term care planning is highly personal, with various options depending on individual needs and resources. This was just an overview; we encourage you to seek advice tailored to your unique situation.