Chapter 2 — Financing Long-Term Care

In the past, when a person developed a loss in functioning, he or she was usually cared for by a family member. And of course, this is still common today — many people provide care to a spouse, an elderly parent, or another relative. But changes in society and in family structure are making this a less feasible solution for many people. Life expectancies are longer and families are smaller than in the past, so there are simply more elderly people needing care in proportion to the number of younger people available to provide it. There are also more single people and childless couples, so many people have no adult children to rely on. And while in the past many women did not work outside the home and were able to provide care, this is much less common today.

Consequently, today when a person needs long-term care, there may be no family member to provide it. Or there may be one person who must take on the entire burden herself, or a married couple must try to raise their children, care for an elderly relative, and hold down full-time jobs all at the same time.

Clearly, many people need to receive long-term care services from paid personnel. Can they simply pay for these services out of their own income and assets? Because of the cost and the anticipated impact of inflation, this is difficult if not impossible for all but the wealthy.

Of course, Amber has 30 years to save and invest. But it will take an enormous effort. And at the same time she must pay for current living expenses and save and invest for her children’s college education and her own retirement.

There are other problems with paying out of one’s own financial resources. Even if a person is able to pay for the care she needs, in doing so she may deplete family assets. What then becomes of her surviving spouse? He may see his standard of living lowered or even be forced into poverty. And the use of personal assets to pay for long-term care may also mean that inheritances are not left to children and grandchildren — this is particularly troubling when liquidated assets include a family business or farm. Finally, if long-term care is needed sooner than expected, funds accumulated so far may fall short of expenses.

Those who do not make plans to fund possible long-term care costs often end up having to pay for their care out of their own pockets. Others consciously plan to use their own income, savings, and assets to pay for care. Aside from savings accounts, stocks, and bonds, there are a few other funding sources self-funders can tap, including home equity, annuities, life insurance policies, and health savings accounts (HSAs).

The most important financial asset many older people have is home equity — the value of the home they own after any mortgage amount owed or other liability has been subtracted. Home equity can be substantial, especially if the home was purchased many years before and the mortgage has been mostly or entirely paid off.

In the past, there were only two main ways of turning home equity into funds: selling the home or taking out a home equity loan. Each has serious drawbacks. Selling means leaving a longtime residence, and a home equity loan requires regular payments at a time when a person needs more income, not another expense. Fortunately, there is another method: reverse mortgages.

Reverse mortgages are typically available to those 62 and older. In a reverse mortgage, a bank lends money to a homeowner with the home serving as security. However, the homeowner does not have to make regular payments to the lender. Instead, the loan must be paid off only when the homeowner dies, sells the home, or moves out of the home. The lender’s payment can be made in a lump sum, in monthly payments, through a line of credit, or a combination of these.

An annuity is a type of investment. The investor (the annuitant) pays money to an insurance company and in return the insurer makes regular payments to the annuitant over a period of time. The payments from an annuity can be used to pay some of the cost of long-term care services. Alternatively, an annuity can be used in combination with long-term care insurance — the annuity income pays for LTCI premiums, and the policy covers the costs of care.

Based on 2026 market rates, a person age 60 might purchase an annuity paying $5,000 annually for life for approximately $80,000. At age 65, that same income stream could be secured for approximately $64,000. As a general rule, the older the purchaser, the less the annuity costs. Keep in mind, however, that $5,000 per year falls far short of actual long-term care costs today — a semiprivate nursing home room runs over $118,000 annually. Unless a very large amount is invested in an annuity, payments will cover only a portion of long-term care expenses.

A life insurance policy provides protection against the financial consequences of the death of an individual. A person can obtain money from a life insurance policy in various ways and use that money to pay long-term care expenses. However, this approach has serious disadvantages and should generally be used only as a last resort by those who have no other options.

• Accelerated death benefits (living benefits) — payments of a portion or all of the death benefit before the insured’s death when a benefit trigger occurs, such as terminal illness, nursing home confinement, inability to perform ADLs, or cognitive impairment. The amount may be a fixed figure or a percentage of the death benefit (50–80% is typical). However, money advanced reduces the benefit available to beneficiaries and most life policies are for relatively small amounts.
• Viatical settlements — a terminally or chronically ill insured (the viator) sells his life insurance policy to a viatical company for a lump sum less than the death benefit. The viatical company becomes the owner and beneficiary, pays premiums, and eventually receives the death benefit. Proceeds from viatical settlements are typically received tax-free.
• Life settlements — similar to a viatical settlement but no requirement that the insured be terminally ill (generally only applicants over 70 are accepted). The lump sum received is much lower because life expectancy is usually longer. There may be tax consequences for life settlements.
• Policy loans, withdrawals, and surrenders — permanent life insurance policies (but not term policies) accumulate a cash value that the insured can access through a loan, withdrawal, or policy surrender. Accessing cash value tends to defeat the purpose of life insurance and accumulated cash value is usually not sufficient to pay for long-term care for very long.

An HSA is a tax-advantaged arrangement designed to help people pay for their healthcare, and it can also be used to fund long-term care. Contributions to an HSA (up to an annual limit) are tax-deductible, investment earnings are tax-free, and withdrawals used to pay qualified healthcare or long-term care expenses are also tax-free.

HSA funds can be used tax-free to pay long-term care expenses not covered by insurance, or to pay LTCI premiums within certain limits. However, given the annual contribution limits, it will be many years before anyone accumulates sufficient HSA funds to cover a substantial amount of long-term care costs. In the meantime, HSAs can serve as a tax-advantaged supplementary funding source.

Many people believe that the Medicare program will pay most of their long-term care expenses after age 65. Others think that Medicare supplement (Medigap) insurance covers most long-term care services not reimbursed by Medicare. Unfortunately, the benefits Medicare and Medigap insurance provide do not adequately meet long-term care needs.

Medicare is a federal healthcare benefits program that helps pay for medical services of people age 65 and older, as well as some persons under 65 who are disabled or suffer permanent kidney failure (end-stage renal disease). A Medicare beneficiary may choose the original Medicare plan or a Medicare Advantage plan.

• Medicare Part A primarily covers inpatient care in hospitals.
• Medicare Part B primarily covers physician services, outpatient hospital care, and some other medical services not covered by Part A. The standard Part B premium is $202.90 per month in 2026. Premiums are adjusted upward for higher-income beneficiaries through the Income-Related Monthly Adjustment Amount (IRMAA) — single persons with a MAGI over $109,000 and couples with a MAGI over $218,000 pay higher premiums.
• Medicare Advantage (Part C) — private-sector health insurance plans (HMOs and PPOs) that provide Part A and Part B benefits plus some additional benefits.
• Medicare Part D — a prescription drug benefit program. In 2026, the annual deductible is up to $615. Once a beneficiary’s total out-of-pocket drug costs reach $2,100, the plan pays 100% of covered drug costs for the rest of the year. The coverage gap (“donut hole”) was eliminated as of 2025. The average stand-alone Part D premium is approximately $34.50/month.

Medicare does provide very limited benefits for nursing home care, but only if all of the following conditions are met:

• The individual has had an inpatient hospital stay of at least three consecutive days within the last 30 days.
• The individual needs skilled care. If he needs only personal or supervisory care, he is not eligible for benefits.
• A physician has determined there is a medical necessity for skilled care — meaning it is required for the diagnosis and treatment of a medical condition.
• The skilled nursing facility is certified by Medicare.

In theory, Medicare can pay up to 100 days of nursing home benefits. But in practice this rarely happens, as few people continue to meet the medical necessity requirement for very long. In cases where Medicare continues to pay benefits beyond 20 days, the beneficiary must make a daily copayment of $217 per day (2026) for days 21 through 100. All benefits end after 100 days.

Medicare Part A pays benefits for home health care, but only if strict conditions are met: the beneficiary must need home care within 14 days after a qualifying hospital or skilled nursing facility stay; a physician must certify the medical necessity of intermittent skilled nursing care or therapy; the beneficiary must be homebound; and care must be provided by a Medicare-certified agency. If all conditions are met, Medicare pays for intermittent skilled nursing care and therapy, limited to 100 visits and severely limited in duration by the medical necessity requirement.

Medicare Part B provides the same home healthcare benefits without requiring a prior hospital stay, and Part B benefits are not limited to 100 visits — though still limited by medical necessity. In summary, Medicare home healthcare benefits do not meet long-term care needs because only skilled care that is medically necessary is covered.

Many Medicare beneficiaries buy private Medigap insurance to pay some of the deductibles, copayments, and coinsurance amounts required by Medicare. Medigap benefits associated with long-term care include at-home recovery benefits and the daily copayment coverage ($217/day for days 21–100 of nursing home care). However, neither goes very far in meeting the needs of those requiring long-term care for an extended period. Medicare Advantage plans similarly do not provide any substantial coverage in the area of long-term care.

The Medicaid program pays for healthcare for the poor of all ages. Unlike Medicare, Medicaid provides extensive benefits for long-term care, but only to those who are impoverished. However, some people who are not poor when they first need long-term care are eventually able to rely on Medicaid to cover the costs of their care — they spend their assets and income on care until they have very little left, at which point they meet Medicaid’s definition of poverty and qualify for benefits. This practice is called spending down.

Medicaid is a federal-state program. Each state administers its own program and determines eligibility criteria, services covered, and payment rates. Medicaid accounts for approximately 49 percent of all long-term care expenditures nationally.

In simplest terms, to be eligible for Medicaid a person must be poor. Some people are categorically needy — defined as poor because they fall into certain categories, such as recipients of Supplemental Security Income (SSI). The maximum monthly SSI benefit is $994 for individuals and $1,491 for couples in 2026.

Most state Medicaid programs also extend eligibility to some people who are considered medically needy — those whose income and assets were above the poverty level but have been depleted by medical or long-term care expenses. For a person to qualify as medically needy, the value of her financial assets must be below the eligibility limit, and her income (or remaining income after medical expenditures) must also be below a certain level.

The asset eligibility limit is generally about $2,000 for an individual and $3,000 for a married couple. Medicaid divides financial assets into countable assets (considered in determining whether a person exceeds the eligibility limit) and noncountable assets (exempt assets that are not counted).

Countable assets include: cash, savings and checking accounts, certificates of deposit; stocks and bonds; IRAs, Keogh accounts, and other retirement funds; trusts; life insurance cash value above certain limits; items that may be converted into cash; and in some cases, the applicant’s home.

Noncountable assets include: household goods and personal effects; one automobile; small life insurance policies; wedding and engagement rings; burial plots and burial funds; and the applicant’s home in most cases.

Treatment of the primary residence: If the applicant is applying for long-term care benefits, the home is countable if the equity value is more than $752,000 (the 2026 federal minimum home equity limit; states may set a higher limit) unless a spouse, dependent child, or disabled child lives in it. If the applicant has permanently left her home to live in a nursing home, the home is countable regardless of value, unless a qualifying family member lives in it. Where a home is deemed noncountable, a lien may be placed on it so that if it is sold, Medicaid must be reimbursed.

Many states also have income eligibility limits — generally no higher than the federal poverty level (in 2026, $15,960 annually for an individual and $21,640 for a couple). If a person qualifies for Medicaid and enters a nursing home, almost all her income must be spent on care. She may retain only a small personal needs allowance (usually $30–$90 per month) to cover items such as toiletries and reading material.

Medicaid rules have evolved to prevent spousal impoverishment — ensuring the community spouse (the spouse who remains at home) retains a reasonable amount of financial resources.

If a community spouse has income of his own, he retains that income. If he has little or no income, the spousal impoverishment rules provide for a Minimum Monthly Maintenance Needs Allowance (MMMNA) ranging from $2,643.75 to $4,066.50 per month in 2026, depending on the state and the community spouse’s actual housing costs.

A couple must spend countable assets above the eligibility limit on care, except for a Protected Resource Amount (PRA) reserved for the community spouse. All states must allow the community spouse to retain countable assets up to a minimum of $32,532 in 2026. States may allow the community spouse to keep up to a federal maximum of $162,660.

Medicaid rules address the practice of giving assets to family members to qualify for Medicaid. They apply to transfers for less than fair market value made during the look-back period of 60 months (five years) before the Medicaid application (for transfers made on or after February 8, 2006). If a disqualifying transfer has occurred, a penalty period is imposed. The length of the penalty period is determined by dividing the value of the transferred asset by the state’s average monthly private-pay rate for nursing facility care. There is no limit to the length of a disqualification period.

Under the DRA, the penalty period begins on the first day of the month in which the Medicaid applicant enters a nursing home and otherwise meets Medicaid eligibility requirements — closing the pre-DRA loophole where penalty periods could elapse before the Medicaid application was filed.

Certain types of asset transfers are permitted, including transfers to a spouse; to a third party for the sole benefit of the spouse; to certain disabled individuals or trusts; for a purpose other than to qualify for Medicaid; and transfers where Medicaid determines that imposing a penalty would cause undue hardship.

When a Medicaid recipient dies, Medicaid generally seeks to recover from the estate the money it paid in benefits. Estate recovery normally applies to recipients in nursing homes and to those who began receiving benefits for home-based and community-based care after age 55. Medicaid may not recover a decedent’s home before the death of a surviving spouse, and in some cases the home may be protected from recovery and preserved for surviving children or siblings. States differ considerably in how they administer estate recovery.

For those who qualify, Medicaid benefits are extensive. All states are required to pay for nursing home care and for home healthcare for those who are “nursing home eligible.” An increasing number of states also pay benefits for home and community-based services. Unlike Medicare, Medicaid generally pays for personal and supervisory care even if skilled care is not also needed, and covers ongoing care needed to cope with a chronic impairment.

However, there are important limitations and disadvantages to relying on Medicaid:

• Loss of independence — spending down leaves a person with extremely limited assets and income, making them dependent on the government.
• No inheritance — hard-earned assets cannot be left to heirs or used to help grandchildren.
• Limited care options — home and community-based benefits are not offered everywhere. Nationally, only about 33% of Medicaid long-term care spending goes to home and community-based services. Some Medicaid recipients who could be cared for at home are forced into nursing homes.
• Limited facility choice — because Medicaid pays less than private rates, desirable nursing homes may not accept Medicaid recipients. Recipients may end up wherever a bed is available, possibly far from family and friends.

In summary, those who rely on Medicaid to meet their long-term care needs lose their assets and financial independence and often have limited choices of types of care and facilities.