Three Ways to Pay for Long-Term Care: Comparing Your Options

Long-term care costs are rising faster than most people expect. In 2024, a private room in a nursing home averaged $127,750 annually. Assisted living jumped 10% to $70,800 per year. Even in-home care with a health aide now costs nearly $78,000 annually.

Nearly 70% of Americans over 65 will need some form of long-term care. For women, who typically live longer, the likelihood is even higher. Yet most people reach retirement without a plan for how they'll pay for care.

You have three primary funding options: using savings, tapping home equity, or purchasing insurance. Let's explore each approach and help you determine which strategy makes sense for your situation.

Option 1: Self-Funding with Savings

How It Works

Self-funding means paying for care directly from your retirement accounts, investments, and other assets. You withdraw funds as needed to cover monthly care expenses.

Best For

This approach works best if you have substantial liquid assets. Financial advisors often suggest you need at least $1 million to $2 million in assets (beyond your home) to comfortably self-fund.

Ideal candidates:

• Have significant retirement savings and investments

• Prefer not to pay insurance premiums

• Want complete flexibility in care decisions

• Don't prioritize leaving a specific inheritance

• Are comfortable managing financial risk

Advantages

• Complete control over care decisions without insurance restrictions

• No ongoing premiums for coverage you might never use

• Assets remain available for other purposes if care isn't needed

• Ability to strategically manage tax implications

Drawbacks

• Significant financial risk if care needs are extensive

• Unpredictable costs make planning difficult

• One in five people over 65 will face more than $200,000 in care costs

• Market downturns could force you to sell investments at the worst time

• Can deplete assets needed by a surviving spouse

Key Consideration

Work with a financial advisor to model various scenarios. Can your portfolio handle several years of care costs while still supporting your other retirement needs?

Option 2: Using Home Equity (Reverse Mortgage)

How It Works

A Home Equity Conversion Mortgage (HECM) allows homeowners 62 or older to convert home equity into cash without selling. You don't make monthly payments. The loan becomes due when you permanently move out, sell, or pass away.

You can receive funds as a lump sum, monthly payments, a line of credit, or a combination. The 2025 lending limit is $1,209,750.

Best For

This strategy suits people who:

• Are "house-rich but cash-poor"

• Want to age in place

• Have substantial home equity (50% or more)

• Plan to remain in their home long-term

• Have limited retirement savings but significant home value

Advantages

• No monthly mortgage payments required

• Proceeds aren't taxable income

• Doesn't affect Medicare or Social Security benefits

• Can pay for in-home care while staying in your home

• Line of credit option grows over time if unused

• You'll never owe more than the home's worth

Drawbacks

• Must move out for more than 12 consecutive months triggers loan repayment

• Upfront costs of 3% to 5% of home value

• Interest accumulates, increasing what you owe

• Reduces inheritance for heirs

• Must continue paying taxes, insurance, and maintenance

• Not ideal for long-term facility-based care

Key Consideration

Reverse mortgages work best if your goal is aging in place with in-home care. If you'll likely need facility care for an extended period, the 12-month residency requirement becomes problematic.

Option 3: Long-Term Care Insurance

There are two main types: traditional policies and hybrid (linked-benefit) policies.

Traditional Long-Term Care Insurance

How it works: Pay regular premiums. If you need qualifying care, the policy pays benefits up to a daily or monthly maximum for a specific period.

Best for:

• People ages 55 to 65

• Those with $300,000 to $2 million in assets

• Anyone wanting maximum coverage at lowest annual cost

• People in good health who can qualify medically

Advantages:

• Provides most comprehensive coverage per premium dollar

• Benefits designed specifically for long-term care

• Often includes inflation protection options

• Some states offer partnership programs for asset protection

Drawbacks:

• Premiums can increase over time

• "Use it or lose it" if you never need care

• Stricter medical underwriting

• No return of premium unless you buy that rider

Hybrid Long-Term Care Insurance

How it works: Pay a single premium or limited premiums (5 to 10 years) to purchase life insurance with a long-term care rider. If you need care, you access the death benefit early. If not, beneficiaries receive the full death benefit.

Best for:

• People wanting guaranteed value from premiums

• Those with a lump sum available

• Anyone concerned about traditional insurance premium increases

• People who don't want to "lose" premiums if they never need care

• Those who might not qualify medically for traditional coverage

Advantages:

• Guaranteed premiums that never increase

• You or heirs receive benefits regardless

• Often easier medical underwriting

• Can access premium back if you change your mind (depending on policy)

• Many offer cash indemnity benefits (no receipt submission)

Drawbacks:

• Higher initial cost than traditional insurance

• Less long-term care coverage per dollar

• Large upfront premium commitment

• Inflation protection adds significant cost

Example: 60-Year-Old Woman

Traditional policy:

• Annual premium: $3,000 to $4,500

• Monthly benefit: $6,000

• Total potential benefit: $216,000 (3 years)

Hybrid policy:

• Single premium: $100,000

• Monthly LTC benefit: $5,000 to $6,000

• Total LTC benefit: $300,000 to $360,000

• Death benefit if not fully used: $120,000

Creating Your Strategy

Most experts recommend combining approaches rather than relying on just one.

Combination Strategies:

Hybrid Policy + Self-Funding: Buy moderate hybrid coverage for several years of care, then use savings if needed.

Reverse Mortgage Line + Self-Funding: Set up a reverse mortgage line of credit as backup, use savings first.

Traditional Policy + Reverse Mortgage: Purchase comprehensive insurance, tap home equity if benefits run out.

Smaller Traditional Policy + Savings: Buy 2 to 3 years of coverage at lower premium, use savings if care extends beyond.

Questions to Ask Yourself:

• How much of my savings am I comfortable spending on care?

• Do I want to age in place or am I open to a care facility?

• How important is leaving an inheritance?

• What is my family health history?

• Can I afford insurance premiums without compromising retirement?

• Do I have substantial home equity I'd use for care?

Timing Your Decision

In your 50s: Research options and purchase insurance if that's your strategy. Premiums are reasonable and you're likely to qualify medically.

In your early 60s: If you haven't bought insurance, this is your last window before premiums become prohibitive.

Approaching 70+: Focus on self-funding and potentially setting up a reverse mortgage line. Traditional insurance becomes very expensive.

After a health diagnosis: Options become limited. Focus on maximizing available resources.

Working with a Professional

Long-term care planning involves complex decisions across insurance, investments, taxes, and estate planning. A financial advisor can help you:

• Model scenarios based on your specific situation

• Coordinate planning with your overall retirement strategy

• Navigate the insurance marketplace for competitive coverage

• Create tax-efficient withdrawal strategies

• Understand how choices affect your legacy goals

At Life Story Financial, I specialize in helping women navigate these complex transitions. Together, we can evaluate your situation and develop a strategy that balances protection, cost, and peace of mind.

Final Thoughts

There's no perfect solution for funding long-term care, but there are informed choices. The worst strategy is no strategy at all.

By understanding your three main options and how they can work together, you can create a plan that protects your financial security and independence. The key is starting the conversation now, while you have time and options.

If you're ready to develop a long-term care funding strategy, I'd be glad to help. For more retirement planning resources, download my free ebook series. When you're ready, schedule a free call with Life Story Financial.

Frequently Asked Questions

How much does long-term care insurance cost?

Long-term care insurance costs vary significantly based on age, health, and coverage amount. Traditional policies for a healthy 60-year-old typically cost $3,000 to $5,000 annually. Hybrid policies usually require a single premium of $50,000 to $150,000 or payments spread over 5 to 10 years. Women typically pay 20% to 40% more than men for traditional policies due to longer life expectancy. Couples can save 10% to 30% with shared-care policies. Get quotes from multiple insurers as pricing varies significantly for the same coverage.

Can I use a reverse mortgage to pay for a nursing home?

A reverse mortgage can help pay for nursing home care temporarily, but there's a critical limitation. If you move to a nursing home for more than 12 consecutive months, the reverse mortgage becomes due. This makes reverse mortgages most suitable for in-home care or short-term facility stays. Some people use them to pay for a spouse's care while the other spouse remains at home. If extended facility-based care is likely, long-term care insurance or self-funding are usually better options.

Is traditional or hybrid long-term care insurance better?

Neither is universally better. Traditional policies provide more comprehensive long-term care coverage per premium dollar and work best if you have moderate assets ($300,000 to $2 million) and want maximum protection. Hybrid policies make sense if you want guaranteed value from premiums (through the death benefit), prefer stable premiums, have a lump sum available, or might not qualify medically for traditional coverage. If maximizing long-term care protection matters most, choose traditional. If guaranteeing some benefit regardless of whether you need care is important, choose hybrid.