How to pay for long-term care? Several funding options exist

Updated December 19, 2023 

The good news is that the life expectancy of the average American continues to increase. The bad news? The cost of long-term care continues to creep up as well. In this scenario, financial advisers would do well to know about funding options for long-term care.  

This is crucial for financial advisers, so they can assist their clients in choosing the best long-term funding options for their care. In this article, InvestmentNews reveals some of these funding options so advisers can inform their clients about how to pay for long-term care. 

Knowing the difference between healthspan and lifespan 

While the term lifespan is nothing new, these days it can be accompanied by another seemingly unusual term: health span. A person’s lifespan is, of course, the number of years they live. What is a person’s health span and how is it different?  

The health span is how long a person remains healthy while they are alive.  

Why are a person’s lifespan and health span important? Knowing these concepts can give financial advisers a clue about how long their clients may need to fund long-term care. In other words, this can help determine a clients’ time horizon for long-term care and the long-term funds they will need for it.  

The average life expectancy of Americans 

From 1800 to 2015, the average life expectancy has more than doubled, thanks to a wide range of scientific advances in health.  

Improvements in these fields also contributed to vastly improved life expectancies:  

• nutrition 
• sanitation 
• hygiene 
• potable water supplies 
• neonatal healthcare 
• antibiotics 
• vaccines 

These and other public health efforts, combined with improved economic growth, living standards and reduction in poverty, all contributed to much longer life expectancies.  

This table compares the average life expectancies at different times in America and in different countries, showing how it’s greatly improved:  

Comparative Average Life Expectancy in the U.S., Europe, and Asia 

Year or Period	North America	Europe	Asia
1800	35 years	34 years	28 years
1950	68 years	62 years	41 years
2015	78.69 years	78 years	72 years

The average life expectancy in the U.S. is pegged at 79.11 years old as of 2023. This is a small increase from the previous year, which had an average of 79.05 years.  

In previous years, Americans not only had much shorter life expectancies, but funding options for longer life spans did not exist either. Now, the situation is very different.  

The actuarial age 

Actuarial age is the estimated age a person will reach, considering their medical history, lifestyle, present health condition, and other factors. The actuarial age is determined by an actuary who uses scientifically proven mathematical and statistical models.  

The actuarial age is not a figure that can predict a person’s lifespan with absolute certainty. Some people can live much shorter or longer lives than their actuarial age due to their lifestyle, current health status, and medical history. However, as a tool in the insurance industry, the actuarial age can get very close to the actual lifespan of most people.  

The average retirement age for Americans 

According to a 2022 Gallup poll, the average retirement age for Americans is 61 years old. However, with the steady rise in life expectancy, the retirement age could change in the next few years. Considering the retirement age is also important. This can give financial advisers a glimpse into how much time their clients have for contributing to their IRAs, health savings accounts, insurance plans, etc.  

This can also give an idea of how much money their clients can save, and how much they’ll have for long-term health care if they need it.  

Most people assume that “long-term care” pertains only to a nursing home for retirees. This is a common misconception. In fact, long-term care connotes several other types of care like home health care, personal care, homemaker services, and a few more. Here’s a video that details the nature and importance of long-term care:  

Funding options for long-term care 

Knowing the funding options available for long-term care is crucial for your clients. The U.S. Department of Health and Human Services states that most people who turn 65 have a 70% chance of needing some form of long-term care. Here are some options financial advisers can recommend:  

1. Medicaid 

Medicaid is the most popular way of funding long-term care in the U.S. In 2017, 62% of nursing homes were paid via Medicaid. Although the federal government provides some of the funds, Medicaid is mostly a state-run program. This means that the qualifications for eligibility can vary from state to state.  

When applying for Medicaid, a person’s monthly income must not exceed $2,533 (or $30,276 per year). In most states, an applicant must likewise not have financial assets worth more than $2,000. Homes and vehicles are not part of the asset limits.  

For those with moderate income or wealth, getting Medicaid means adopting a spend-down strategy to become eligible. Should a person qualify for Medicaid, the program can cover:  

• Assisted living – 47 states and Washington, D.C. now provide some financial assistance for assisted living as of 2022. The program can be listed as adult foster care, supported care, or residential care.  
• Nursing homes – all state Medicaid programs must cover this, if necessary, although state officials may decide on how much to pay for these facilities.  
• Home-based community services – generally, these services are provided to retirees who would be sent to a nursing home if these services were not available. Coverage may include cooking and cleaning, bathing, feeding, and dressing. Nursing services like administering medications and monitoring blood pressure and glucose levels are also included in this package.  

2. Medicare 

lthough Medicare does not cover most forms of long-term care, this program can be used to fund the following services:  

• Skilled nursing facilities (SNF) – Medicare covers the use of SNF if the account owner has had a hospital stay that lasted at least three days. For skilled nursing facilities, the first 20 days are covered in full, while days 21 to 100 require a copayment. Retirees who use this service past the 100-day mark must pay for all the charges.  
• Home health services – this includes doctor-prescribed services like physical therapy or occupational therapy (excluding personal care like bathing or feeding) 
• Medical supplies or equipment – includes hospital bed, wheelchairs, walkers, blood sugar monitors, and oxygen tanks 
• Hospice care – this can include respite care for family members. The minute Medicare coverage takes on the costs of hospice care, it can no longer be used to pay for hospital costs, treatments, or prescriptions for treating the person’s illness.  

3. VA health care 

The U.S. Department of Veterans Affairs (VA) is a federal government agency that provides health care and benefits to military veterans. If your client is a veteran, they can get home and community-based services as long as they qualify and are enrolled in VA health care.  

This is available to vets who have a need for it, and they are in a location that can provide the services. There are no financial eligibility requirements.  

Qualified veterans also have at least two additional programs available to them. These can help pay for the cost of long-term care by increasing their monthly pensions:  

• Aid and Attendance (A&A) – for those who need assistance in personal care, are partially bedridden, are placed in a nursing home, or have limited eyesight 
• Housebound – for those who have limited mobility and cannot go outside of their home due to a permanent disability 

The VA has its own nursing homes (called community living centers) and may contract with third-party nursing homes to care for veterans.  

Eligibility requirements for these long-term care services may vary and are based on the individual veteran’s service-connected status, level of disability, and income.  

The VA does not cover assisted living, though it may cover some extra services (like nursing care) at its facilities.  

4. Health Savings Accounts 

In recent years, Health Savings Accounts (HSAs) have become more popular as a funding option for long-term care. Through HSAs, people with high-deductible insurance plans can save pre-tax dollars for future medical expenses even if the money isn’t spent for years in the future.  

What makes this a good option for funding long-term care? HSA works as a tax-free source of cash retirees can use to cover medical expenses upon retirement. Retirees are allowed to use HSA money on any IRS-approved medical expenses for themselves, their spouse, or a dependent – including medical equipment and copayments for doctor’s appointments.  

HSA funds can also pay for long-term care if a doctor certifies that:  

• the individual cannot do at least two activities vital to their day-to-day lives (like bathing and dressing themselves) without significant assistance for at least 3 months 

• the individual suffers from cognitive impairment that poses a threat to their health or safety, and they need significant supervision 

If an individual meets those requirements, they can spend their HSA savings on: 

• nursing services, including administering medication or changing dressings. This could be provided in the person’s home or another care facility 
• personal care needs, including bathing, dressing, feeding and assisting with toileting or incontinence 
• physical therapy or occupational therapy 

5. Reverse mortgages 

Also known as a Home Equity Conversion Mortgage or HECM, a reverse mortgage can serve as a good funding option for retirees who will need long-term care. This can be a viable funding option if a client does not have the means or does not know how to pay for their long-term care without Medicaid or without insurance.  

A reverse mortgage lets retirees take a cash loan with their home as collateral.  

Applying for a reverse mortgage requires that the individual be at least 62 years old. The homeowner must also own the house or have a low remaining balance on the home’s existing mortgage.  

Perhaps the biggest appeal of the reverse mortgage is that the retiree doesn’t have to repay the loan until they move out, sell the home, or pass away.  

The reverse mortgage can be paid in monthly installments or as a lump sum payment. The borrower can use the money however they wish, whether it’s for long-term care expenses, repairs, or renovations to their home.  

The loan becomes due only after the borrower stops living at the home for an entire year or when they die. Senior married couples usually sign the reverse mortgage jointly, making repayment of the loan due after the surviving spouse’s death or moving-out anniversary.  

6. Long-term care insurance 

This is like the usual health insurance except the plan covers the costs of routine, daily care over a long period, in whole or in part.  

Long-term care insurance comes in traditional or hybrid plans. In a traditional plan, all the money is used to cover all the costs of long-term care. A hybrid plan, meanwhile, works as a combination of whole life insurance and long-term care insurance. Any remaining funds are converted into a death benefit for the plan owner’s heirs.  

Some financial advisers do not recommend this funding option, as it can run into the thousands of dollars every year to pay for the premiums. Individuals with a preexisting debilitating condition are automatically disqualified, so it’s advisable for clients to sign up when they’re younger and healthier.  

Which option is best when paying for long-term care? 

These are creative ways for clients to pay for costly and unexpected long-term care. Some of these options can help individuals with specific financial problems, like how to pay for a nursing home with no money, for example.  

So which funding option is best? That depends on factors like the individual’s budget, health, actuarial age, and gender (men are more likely to die before their wives do). This video on long-term care insurance vs a nursing home provides some food for thought:  

Financial advisers should be familiar with all the ins and outs of these options and pinpoint their clients’ actuarial age. That way, they can figure out how much money they would need to see them through their remaining years, then work on that figure. It will also be easier to determine which single or mix of options would best suit their clients’ long-term care needs.  

As a financial adviser, did you discover new and creative ways to help clients pay for their long-term care, or were you already aware of them? Which long-term funding options would you recommend?