Managing the Cost of Long-Term Care

Close to 70% of today's 65-year-olds will require long-term care¹—ranging from in-home health aides to full-fledged nursing homes—and the costs are staggering.

The median annual outlay in 2023 was $75,504 for an in-home health aide and $116,800 for a private room in a skilled nursing facility.²

With the average American requiring three years of long-term services and support during their lifetime,³ that means budgeting anywhere from $226,512 for an in-home health aide to $350,400 for a private room in a nursing home⁴ based on today's prices—though your actual costs in the future could be much higher. (Those contemplating retirement communities that provide varying levels of care may need to budget even more; see "One-stop shopping.")

"Unfortunately, long-term care is an emotional issue, and many people are uncomfortable talking about or planning for it until they need it," says Rob Williams, managing director of financial planning and wealth management at the Schwab Center for Financial Research. "Or they may assume their loved ones will be willing and available to help, which can be a significant emotional and financial commitment."

How, then, can you plan for the possibility of long-term care without upending your finances or your loved ones' lives? "It's best to talk openly and honestly about your options with everyone who might be affected," Rob says. "For example, can you afford to pay out of pocket from savings—perhaps with some physical support from family to help keep costs down? Or would you rather have the peace of mind that long-term care insurance can provide, even if you don't end up needing the coverage?"

Deciding on an approach starts with understanding your options and considering how they might fit into your financial plan.

"The appeal of self-funding is you'll pay only for the care you use, whereas with insurance you could pay premiums for years and never use the coverage," Rob says.

The key is to plan ahead and save in ways that are tax-efficient while maintaining your flexibility, including:

• Contributing to a health savings account (HSA): Contributions to HSAs are federally tax-deductible, earnings are tax-free, and withdrawals are also tax-free if used for qualified medical expenses, including long-term care. "To maximize the value of your HSA, try to preserve its tax-free dollars for your long-term care needs by paying out of pocket for routine medical expenses you can afford to cover today," Rob says. You must be enrolled in an eligible high-deductible health plan to make contributions to an HSA.
• Making Roth conversions: Long-term care could require you to take substantial distributions from your retirement accounts to cover your costs, potentially resulting in a significant tax bill. "Consider converting a portion of your tax-deferred savings at regular intervals to a Roth IRA without bumping yourself into the next tax bracket," Rob says. "You'll owe taxes on the converted amount in the year of the conversion, but any future withdrawals can be tax-free for both you and your heirs." (If you're still working, you also may be able to convert traditional 401(k) funds to a Roth 401(k), assuming your plan allows it.)
• Reinvesting required minimum distributions (RMDs): Reinvesting any unused RMDs in a taxable brokerage account can help put that money to work on behalf of your future long-term care. "Should you eventually need to liquidate those assets, only the gains will be taxed," Rob says.

Paying out of pocket may offer additional tax advantages. For example, if you itemize deductions, you can write off all qualifying medical expenses—including long-term care costs—that are medically necessary and exceed 7.5% of your adjusted gross income (your total income minus certain adjustments) on an annual basis. Better yet, if you pay with tax-free dollars from a Roth account, those funds won't be included in your taxable income, making it easier to surpass the 7.5% threshold. (Expenses paid from an HSA do not qualify as a medical deduction.)

Despite the advantages that self-funding can offer, there are risks. First and foremost, any assets invested in the market could lose value, undercutting your ability to pay for care or forcing you to sell assets at an inopportune time.

There's also the risk that excessive care costs could eat into your living expenses. "Those who experience cognitive decline while remaining physically healthy, for instance, typically require many years of care," says Chris Kawashima, CFP^®, a director at the Schwab Center for Financial Research.

"Much of this decision comes down to not just your financial resources but also how you feel about the risk of affording long-term care costs when needed," Chris says. "Even if you can self-insure comfortably, long-term care insurance may still be worth considering, either as a supplement to or in lieu of paying out of pocket."

There are three main ways to access long-term care insurance:

• Traditional policies, whose premiums can increase over time and whose benefits are typically "use 'em or lose 'em"—unless you purchase a return-of-premium rider, which reimburses premiums to your heirs after your death if you never use the policy. Another option is to purchase a shared-care policy that transfers any unused benefits from one spouse to the other.
• Hybrid policies, which effectively use life insurance or an annuity to pay for any eventual long-term care expenses. "It's a way to plan for long-term care and potentially provide for a death benefit or cash value if you die without using the policy's coverage," Chris says. Hybrid policies tend to be more expensive than traditional policies but are typically paid for with either fixed premiums or a one-time payment, protecting you from future premium increases.
• Permanent life insurance with a long-term care rider, which essentially advances you all or a portion of the death benefit so you can use it for long-term care if you need it. Its primary purpose is to ensure a death benefit for survivors, with an optional rider that allows coverage of long-term care expenses, though this is typically less than what a hybrid policy would offer.

It's generally most cost-effective to purchase long-term care insurance in your 50s or early 60s. "The longer you wait to buy a policy, the higher the premiums—and the greater the risk you could be denied coverage entirely," Rob says.

According to the American Association for Long-Term Care Insurance, average annual premiums for a traditional policy in 2024 were $1,750 for a 55-year-old man and $2,800 for a 55-year-old woman, assuming $165,000 in initial benefits that increase 2% each year. Those averages increase to $2,060 and $3,325, respectively,⁵ if the applicants apply for a policy at age 60.

The good news is that such premiums can either be paid from your HSA or deducted from your taxable income, up to the annual limit—assuming you itemize and your total medical expenses exceed 7.5% of your adjusted gross income. Hybrid policy premiums may be only partially deductible.

The older you are, the more of your long-term care insurance costs you can deduct.

As with all insurance, long-term care policies come with caveats, including:

• Eligibility requirements: Benefits generally kick in once you become cognitively impaired or can no longer perform at least two of the six so-called activities of daily living—bathing, dressing, eating, using the toilet, managing continence, and getting in and out of bed and chairs.
• Elimination periods: Having achieved eligibility, a set period of time must elapse before you start receiving benefits, typically 30, 60, or 90 days. (During this time, you must self-fund your care.)
• Coverage limitations: Many policies deny coverage related to drug addiction or war injuries and may require additional waiting periods for care related to preexisting conditions.
• Benefit caps: Covered costs are usually capped at a daily or monthly amount, and the coverage itself may expire after a set number of years.

"If you're going to purchase a long-term care insurance policy, make sure you understand what you're buying—down to what kind of facilities it covers," Rob says.

If, like many people, you find it hard to contemplate the possibility of your own diminished capacity, it can be helpful to work with an impartial third party, such as your wealth advisor or financial consultant, who can help you evaluate options within the context of your financial plan, estate-planning goals, and any concerns you may have about your long-term health.

"There may not be a one-size-fits-all or single solution," Rob says. "A combination of strategies—from partial self-funding and family support to supplemental insurance—may make sense for most of us."