How do I plan for long-term care costs?
In one paragraph
Long-term care planning typically involves some combination of self-funding through savings, purchasing long-term care insurance (or a hybrid life/LTC policy), and understanding how Medicaid eligibility works as a fallback. The earlier planning begins, the more options remain available and the lower insurance premiums tend to be.
What this actually means
Long-term care — assistance with daily activities such as bathing, dressing, eating, and mobility, whether provided at home, in an assisted living facility, or a nursing home — is one of the most underestimated financial risks in retirement planning. According to the U.S. Department of Health and Human Services, roughly 70% of people over 65 will need some form of long-term care during their lifetime. The median annual cost of a private nursing home room exceeds $100,000 in many U.S. markets.
Medicare does not cover most long-term care. It pays for short-term skilled nursing following a qualifying hospital stay, but stops coverage at 100 days and does not cover custodial care. This is the most common misconception among pre-retirees.
**Self-funding** is viable for high-net-worth households. The approach requires setting aside a dedicated pool — often $500,000 or more — that remains untouched unless care is needed. The risk is not knowing in advance whether care will last two months or ten years.
**Traditional long-term care insurance** transfers the risk to an insurer in exchange for annual premiums. Policies purchased in one's 50s are significantly cheaper than those bought at 65. The industry has contracted substantially over the past decade as insurers underestimated claim severity, causing several carriers to exit the market and others to raise premiums sharply on existing policyholders. This volatility has reduced the appeal of standalone policies.
**Hybrid life/LTC policies** combine a life insurance or annuity contract with a long-term care rider. Premiums are typically paid as a lump sum or over a short period, and unused benefits pass to heirs as a death benefit. These policies have grown in popularity precisely because premiums cannot be raised once issued.
**Medicaid** covers nursing home care for individuals who meet asset and income limits — generally requiring spending down most non-exempt assets. Medicaid planning involves understanding look-back periods (typically 60 months for asset transfers), exempt asset categories, and strategies such as irrevocable trusts. This planning is highly state-specific and requires an elder law attorney.
Conversations about care preferences — home care versus facility, who will act as caregiver, and what level of care is acceptable — are as important as the financial plan. Families that discuss these questions before a crisis occurs navigate the transition significantly better.