4 Ways to Pay for the High Cost of Long-Term Care

mature couple looking on computer

The need for long-term care in retirement can be a financial unknown. Not everyone will need help with daily living activities as they age, and some who do may receive unpaid care from friends and family.

But almost half of people who reach age 65 will need at least some paid care over their lifetimes.1 And the cost can be high: On average, people who require paid care can expect to pay almost $140,000 out of pocket; while 9% will spend more than $250,000.2

The takeaway: Even average long-term costs can be out of reach for many people without a financial plan in place. Medicare, contrary to common belief, doesn’t cover long-term care for an extended period. And while Medicaid does, the program is only for those with low incomes and very limited assets.

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As you plan for retirement, evaluate these four options for managing the cost of long-term care, should you need it.

Option 1: Paying Out of Pocket

If you have enough assets, you could rely on them to pay for care as needed. The likelihood of needing care and how much you might end up paying will depend on where you live, as well as personal factors. For instance, does your family’s health history put you at risk of an illness that would require lengthy care? Gender can also be a factor. Women are more likely to develop severe long-term care needs, require assistance for more than two years and spend time in a nursing home.3

To check the price tag in your state, use our calculator to compare the cost of care today with what it could be in the future.

Option 2: Long-term Care Insurance

For the many Americans who can’t afford to pay for care out of pocket and have too many assets to qualify for Medicaid, a long-term care policy can be one strategy. It may also be a good option for those who want to preserve their assets for heirs.

Long-term care insurance covers the cost of care in a nursing home, but many policies also cover care delivered at home, in an assisted living facility and even at adult day care centers. Coverage typically starts after there are signs of cognitive impairment or inability to do two out of six daily living activities such as eating, dressing or bathing.

Your employer may offer long-term care insurance that you can take with you when you leave the job. Or you can buy individual coverage.

For standalone policies, you generally choose a monthly benefit level, whether to add inflation protection to increase this sum over time and a benefit period. A common benefit period is three or five years, but yours could stretch longer if you don’t use your full monthly benefit. Couples, too, may elect to buy policies with a shared benefit, which allows one partner to tap the other’s benefit if needed.

Policies and features vary widely. So, it’s helpful to work with an experienced long-term care insurance agent to guide you through your options.

Use our calculator to get an estimate of premiums for a long-term care policy in your area. To find the right combination of long-term care policy and savings, there are many strategies to consider based on your situation. An advisor can help you weigh your options.

Some advisors suggest the best time to buy a policy is in your mid-50s. Premiums can be lower at that age and you’re less likely to have a health condition that would make you ineligible.

For more financial strategies to cover long-term care, see Long-Term Care: Many Will Need It. Many Won’t Be Able to Afford It.

Option 3: Hybrid Policies

Many consumers are reluctant to buy a long-term care policy that they may not use. That’s why hybrid policies combining long-term care and life insurance benefits have grown more popular. Whether you need care or not, you or your heirs, will get some use out of the policy.

You generally buy a hybrid policy in a lump sum or over a set number of years. If you need long-term care, the policy will help cover the bills up to a limit, often around three times your initial investment. If you don’t need care — or very little of it — your heirs will receive a death benefit.

Hybrid policies that combine long-term care and annuity benefits are also available and work much the same way. If you don’t use the long-term care coverage, you can draw upon the annuity benefit or pass it on to heirs.

Be aware that because hybrid policies are doing more than one job, they may cost more than a standalone long-term care policy.

Option 4: Deferred Income Annuities

Most long-term care claims begin when people are in their 80s, which could make a deferred income annuity a good tool for managing those bills. The annuity doesn’t provide long-term care coverage. Instead, it may provide a stream of income that can help pay for care.

When you buy the deferred income annuity from an insurance company, you choose when you want payments to start and for how long. Payments can begin as soon as two years or as far out as four decades. You can opt to receive payments for a set number of years or for the rest of your life, or your spouse’s life. Insurers often offer other features to tailor the annuity to your needs, although this will affect your payouts.

The government several years ago changed the tax rules to encourage the purchase of a deferred income annuity, also called longevity insurance.4 You can now invest up to $135,000 of your traditional IRA (but no more than 25% of the account balance) in a type of deferred income annuity called a Qualified Longevity Annuity Contract, or QLAC. This money is excluded when calculating required minimum distributions (RMDs) starting at age 72. However, payments from QLACs must start no later than age 85 — at which time they’re subject to income tax.

Learn more about navigating a strategy for long-term care by reading A Guide to Long-Term Care Options.

1 What is the Lifetime Risk of Needing and Receiving Long-Term Services and Supports?, US Department of Health and Human Services, April 4, 2019.

2 Long-Term Services and Supports for Older Americans: Risk and Finance Research Brief, US Department of Health and Human Services, February 2016.

3 What is the Lifetime Risk of Needing and Receiving Long-Term Services and Supports? US Department of Health and Human Services, April 4, 2019.

4 Instructions for Form 1098-Q, Internal Revenue Service, December 2019.

Mutual of Omaha and its representatives do not provide tax and legal advice, and the information provided herein is general in nature and should not be considered tax and legal advice. Consult a qualified professional regarding your specific situation.

Insurance products and services are offered by Mutual of Omaha Insurance Company or one of its affiliates. Home Office: 3300 Mutual of Omaha Plaza, Omaha, NE 68175. Products not available in all states. Each underwriting company is solely responsible for its own contractual and financial obligations.

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc. Not all Mutual of Omaha Advisors representatives

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