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How to Pay for Long-Term Care

Updated: Jun 9

When it comes to financial planning, long-term care (“LTC”) is a life event that often doesn’t get the recognition it should, given its likelihood and substantial cost. So, in a previous column, I gave you an overview of LTC and emphasized the need to plan for it. Here, I continue the focus on LTC by examining three methods to pay for it.

Medicaid is a government program that assists low-income people. Aside from offering health care benefits, it’s the country’s largest provider of LTC payments. If you’re thinking about Medicaid as your LTC funding source, consider the following:


  • MEDICAID'S LTC COVERAGE IS LIMITED. For example: (1) It typically excludes LTC at home, which is significant since older adults prefer to age in place; (2) Only the lowest-grade nursing homes accept Medicaid, which is noteworthy since older adults consider quality healthcare a top priority.

  • MEDICAID MAY GO AFTER YOUR ESTATE TO RECOVER THEIR COSTS. In general, a state can do this in two ways: (1) Seek repayment from your estate after you die; (2) Place a lien on your property while you're alive.

Given these drawbacks, Medicaid is generally viewed as the last-resort option for LTC.

On the other end of the financial spectrum, some individuals use their own assets to cover LTC expenses. To determine if Self-Funding is right for you, consider the following:


  • YOU MAY HAVE TO USE THE ASSETS YOU SET ASIDE AS AN INHERITANCE TO YOUR CHILDREN, GRANDCHILDREN, AND OTHER LOVED ONES. If your financial legacy is important, you should choose a different funding approach.

  • YOU RUN THE RISK OF SELLING ASSETS IN A MARKET DOWNTURN, CREATING LONG-TERM CONSEQUENCES FOR YOUR RETIREMENT FUNDS. By selling low, your remaining funds will have a difficult time achieving the growth you need for a lasting retirement income.

Traditional LTC Insurance has advantages over self-funding and Medicaid. Most notably: (1) It transfers financial risk to a private insurance carrier; (2) It covers a wide range of LTC services, from home health care to nursing home stays; and (3) The benefit payments are income tax-free. Unfortunately, such products have two defects that make them unpopular:

  • PREMIUM INCREASES. Periodically, insurance carriers increase the premiums – sometimes dramatically – to account for changes in the projected cost of claims. (Side note: Such increases must be approved by state regulators and must apply to a group of policies with similar characteristics.)

  • “USE IT OR LOSE IT”. Policyholders who go through life without needing LTC will never receive any benefits. Instead, the insurance carrier keeps the premiums to pay for other people’s claims. (Side note: Most insurance products have a “use it or lose it” structure. The premiums aren’t meant to generate an investment return. Instead, they afford meaningful protection against potential financial losses.)

Next time, I’ll present a funding method that incorporates the positives of Traditional LTC Insurance… and addresses its deficiencies. In addition, I’ll provide a list of questions to help you determine which LTC funding option is best for you!

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