Long-Term Care Planning: Costs, Insurance, and Self-Funding Strategies

Long-term care—whether in-home assistance, assisted living, or nursing home care—is one of the largest and most unpredictable retirement expenses. The median cost of a private nursing home room exceeds $100,000/year, and Medicare covers almost none of it. This guide explains the true costs of long-term care, whether long-term care insurance makes sense, and self-funding strategies to protect your retirement savings if you need care.

The True Cost of Long-Term Care

Long-term care costs vary dramatically by location and level of care needed:

2025 National Median Costs (per year)

Type of Care	Annual Cost	Notes
Home health aide (44 hrs/week)	$75,000	Most affordable option if family can supplement
Adult day care (5 days/week)	$21,000	Provides relief for family caregivers
Assisted living facility	$64,000	Includes housing, meals, some personal care
Nursing home (semi-private room)	$104,000	24/7 medical care and supervision
Nursing home (private room)	$116,000	Higher cost for privacy

Geographic variation: Costs are 30-50% higher in major metro areas (NYC, San Francisco, Boston) and 20-30% lower in rural/Southern states.

How Long Will You Need Care?

• Average duration: 3 years
• 20% need care for 5+ years: This is where costs become catastrophic
• Men vs. women: Women need care longer on average (3.7 years vs. 2.2 years for men)
• Couples: 50% chance at least one spouse will need 5+ years of care

What Medicare and Health Insurance DON'T Cover

Many retirees incorrectly assume Medicare will pay for long-term care. It won't.

Medicare Coverage (Very Limited)

• Skilled nursing facility: Covers up to 100 days ONLY if:
  • You had a 3+ day hospital stay first
  • You need skilled nursing or rehab (not custodial care)
  • Days 1-20: Fully covered
  • Days 21-100: You pay $204/day coinsurance (2025)
  • After 100 days: You pay 100%
• Home health care: Covers part-time skilled nursing or therapy (NOT full-time personal care or help with daily activities)
• What Medicare NEVER covers: Long-term custodial care (bathing, dressing, eating, toileting), assisted living, nursing home stays beyond 100 days

Medicaid Coverage (Asset-Limited)

• What it covers: Nursing home care and some home/community-based services
• Eligibility catch: Must have very low income and assets (typically under $2,000 in countable assets for an individual)
• Spend-down requirement: Most people must deplete nearly all savings before qualifying
• Spousal protections: Healthy spouse can keep the home and ~$150,000-$155,000 in assets (2025)

Long-Term Care Insurance: Does It Make Sense?

Long-term care insurance (LTCI) pays for care when you can't perform 2+ Activities of Daily Living (ADLs): bathing, dressing, eating, toileting, transferring, continence.

How Long-Term Care Insurance Works

• Daily/monthly benefit: Policy pays up to a set amount per day/month (e.g., $150/day or $4,500/month)
• Benefit period: How long benefits last (common options: 3 years, 5 years, lifetime)
• Elimination period: Waiting period before benefits start (like a deductible), typically 30-90 days
• Inflation protection: Optional rider that increases benefit 3-5%/year to keep pace with rising care costs

Typical LTCI Policy Costs (2025)

• Age 55: $2,000-$3,000/year for $165,000 total benefit (3 years at $150/day)
• Age 60: $3,000-$4,500/year for same benefit
• Age 65: $4,500-$7,000/year for same benefit
• Couple (both age 60): $5,000-$8,000/year with shared benefit and spousal discount

Key factors affecting cost: Age at purchase, benefit amount, benefit period, inflation protection, health status

When LTCI Makes Sense

• Net worth $200k-$2M: Can afford premiums but don't have enough to self-fund 5+ years of care
• Family history of longevity/dementia: Higher likelihood of needing extended care
• Want to protect spouse's financial security: Prevents one spouse's care costs from depleting assets needed by the other
• Want to preserve inheritance: Keep assets for heirs rather than spending on care
• Purchase in your 50s: Premiums are more affordable and you're more likely to qualify health-wise

When LTCI May NOT Make Sense

• Net worth under $200k: You'll likely qualify for Medicaid relatively quickly—paying premiums may not be worth it
• Net worth over $3M+: You can self-fund care without risking financial security
• Can't afford premiums comfortably: If premiums strain your budget now, they'll be worse in 10-20 years (and you can't let policy lapse after paying for decades)
• Significant health issues: You may not qualify, or premiums will be prohibitively expensive
• Age 70+: Premiums are very expensive and you may not pass health underwriting

Hybrid Life Insurance + LTCI Policies

Traditional LTCI has a "use it or lose it" problem—if you never need care, you lose all premiums paid. Hybrid policies solve this:

How Hybrid Policies Work

• Combination product: Permanent life insurance with a long-term care rider
• If you need care: Accelerate death benefit to pay for care (e.g., $300k policy → $6,000/month for 50 months)
• If you never need care: Full death benefit pays to heirs
• Premium structure: Often single lump-sum or 10-year payment plan (not lifetime premiums like traditional LTCI)

Pros and Cons vs. Traditional LTCI

• Pros:
  • Guaranteed premiums (can't increase like traditional LTCI)
  • Money isn't "lost" if you don't need care—heirs get death benefit
  • Easier to qualify (less strict health underwriting)
• Cons:
  • Higher upfront cost ($50k-$150k lump sum or $5k-$10k/year for 10 years)
  • Less comprehensive coverage than dedicated LTCI
  • Reduces inheritance if care is needed (since death benefit is used for care)

Best for: People who want LTCI protection but don't want "use it or lose it" premiums, and who have a lump sum to invest

Self-Funding Long-Term Care

If you have significant assets or prefer not to buy insurance, you can self-fund care costs:

How Much to Set Aside

• Conservative estimate: $300k-$500k earmarked for potential care costs (covers 3-5 years in most areas)
• Aggressive estimate: $150k-$250k (covers 2-3 years, assumes you'd transition to Medicaid if needed)
• Rule of thumb: Have at least $1M in investable assets to comfortably self-fund without risking retirement security

Strategies for Self-Funding

1. Dedicated Long-Term Care Fund

• Approach: Earmark $300k-$500k in a separate account for LTC expenses
• Investment: Keep in conservative, liquid investments (bonds, short-term CDs, money market)
• Pro: Ensures funds are available when needed
• Con: Reduces growth potential of those assets

2. Home Equity as LTC Reserve

• Approach: Count on selling home or reverse mortgage to fund care
• Pro: Keeps assets invested for growth in the meantime
• Con: Assumes home value holds and you're willing to sell/move

3. Income-Focused Portfolio

• Approach: Build portfolio that generates $50k-$75k/year in dividends/interest to cover care costs
• Pro: Can fund care from income without depleting principal
• Con: Requires very large portfolio ($1.2M+ at 5% yield)

4. Annuity with LTC Rider

• Approach: Purchase immediate or deferred annuity with long-term care doubler (if you need care, payments double)
• Pro: Guaranteed income plus LTC protection
• Con: Annuities have fees and reduce liquidity

Medicaid Planning (Spend-Down Strategy)

If you don't have insurance or sufficient assets to self-fund, Medicaid will eventually cover nursing home care—but only after spending down assets:

Medicaid Eligibility (2025)

• Countable asset limit: $2,000 (individual), varies by state
• Exempt assets:
  • Primary residence (up to ~$713,000 equity in most states)
  • One vehicle
  • Personal belongings, household goods
  • Prepaid funeral/burial
• Income limits: Varies by state; some states have no income limit if care costs exceed income

Spousal Protections

• Community spouse resource allowance: Healthy spouse can keep ~$155,000 in assets (2025)
• Home protection: If healthy spouse lives in the home, it's exempt (no matter the value in most states)
• Income protection: Healthy spouse keeps their own income plus potentially some of the institutionalized spouse's income

Look-Back Period and Gifting Rules

• 5-year look-back: Medicaid looks back 5 years for asset transfers made for less than fair market value
• Penalty period: If you gave away $100k two years before applying, you may be ineligible for months/years
• Strategic gifting: Must be done at least 5 years before needing care to avoid penalties

Warning: Medicaid planning is complex and varies by state. Consult an elder law attorney before making large asset transfers.

Family Caregiving: The Hidden Cost

Many families provide unpaid care to avoid facility costs—but it's not truly "free":

• Lost wages: Adult children often reduce work hours or quit jobs to provide care
• Physical/emotional toll: Caregiver stress, burnout, health issues
• Opportunity cost: Years out of the workforce reduce Social Security benefits and retirement savings
• Home modifications: Ramps, grab bars, stair lifts, accessible bathrooms
• Respite care: Family caregivers need breaks—hiring temporary help or adult day care

AARP estimates: Family caregivers provide an average of $7,000/year in unpaid care (valued at market rates)

How to Plan for Long-Term Care Costs

1. Assess your risk: Family history, health status, gender (women need care longer)
2. Calculate self-funding capacity: Can you afford $100k-$150k/year for 3-5 years without depleting assets?
3. Decide on insurance vs. self-funding:
   • Under $200k assets → Plan for Medicaid
   • $200k-$2M assets → Consider LTCI or hybrid policy
   • Over $2M assets → Self-fund is likely viable
4. Shop for LTCI in your 50s: Premiums are cheaper and you're more likely to qualify
5. If buying LTCI, prioritize:
   • Inflation protection (essential—care costs rise 3-5%/year)
   • 3-5 year benefit period (balance of coverage and affordability)
   • 90-day elimination period (keeps premiums lower)
6. Review annually: LTC planning isn't "set and forget"—revisit as assets, health, and family situation change

Using Bullseye to Model Long-Term Care Costs

Bullseye helps you test how long-term care expenses would affect your retirement plan:

• Add LTC as an expense: Create one-time or recurring expenses for care costs (e.g., $100k/year for 3 years starting at age 80)
• Test multiple scenarios: Use the Scenarios feature to model:
  • No LTC needed (baseline)
  • 3 years of care at $100k/year
  • 5 years of care at $120k/year (catastrophic scenario)
• See asset depletion: Bullseye projects whether your assets can sustain the expense or if you'd run out of money
• Compare insurance vs. self-funding: Model paying LTCI premiums vs. setting aside assets for self-funding

Limitation: Bullseye doesn't automatically calculate Medicaid spend-down or spousal protections—you'll need to model those manually.

Summary: Your Long-Term Care Planning Checklist

1. Understand the costs: $75k-$116k/year depending on level of care
2. Know what Medicare doesn't cover: Almost nothing beyond 100 days post-hospitalization
3. Assess your risk: 70% need some care, 20% need 5+ years
4. Choose your strategy:
   • LTCI if you have $200k-$2M and can buy in your 50s
   • Hybrid policy if you want death benefit + LTC coverage
   • Self-fund if you have $1M+ and prefer control
   • Medicaid if assets are limited
5. Model the impact: Use retirement planning tools to test how LTC costs would affect your finances
6. Review and adjust: LTC planning should evolve as your health, assets, and family situation change