Long-Term Care Insurance Pros and Cons

Long-term care insurance can cover the costs of ongoing assistance you may need because of age-related decline in cognitive or physical ability, or a chronic condition. This coverage can keep you from having to use your savings to pay for home care, assisted living or a nursing home – all of which generally are not covered by health insurance or Medicare. However, long-term care insurance can be costly and may offer limited protection.

A financial advisor can help you evaluate your options if you’re interested in long-term care insurance and plan around a policy.

What Is Long-Term Care Insurance?

Health insurance can pay for short-term medical care, including surgery, hospital stays and doctor’s office visits. But health insurance, including Medicare, generally does not cover costs for extended care in nursing homes and assisted-living facilities, as well in-home assistance with activities of daily living such as bathing and getting dressed. Medicaid can pay for these services, but only for people with limited financial means.

Costs for long-term care can be quite high, with the median price of a semi-private room in a nursing in 2023 was $8,669 per month or $104,025 per year, according to GenWorth. Those costs will rise to nearly $14,800 per month and $177,600 per year by 2025 if inflation averages just 2% per year.

To avoid paying for these services with your assets, you can use long-term care insurance. However, this coverage also comes with some limitations and drawbacks. Here’s a look at the pros and cons of long-term care insurance.

Pros of Long-Term Care Insurance

Planning for long-term care is an important part of preparing for retirement, especially as healthcare costs continue to rise. Long-term care insurance is designed to help cover expenses that traditional health insurance and Medicare typically don’t. This form of insurance can:

• Financial protection against high costs: Long-term care can be expensive, and insurance helps cover the costs of services like in-home care, assisted living and nursing homes. Without coverage, these expenses may quickly deplete personal savings or retirement funds.
• Asset preservation: LTC insurance can help protect assets by reducing the need to pay for care out of pocket. This can be particularly useful for those who want to leave an inheritance or maintain financial stability for a spouse.
• More care options: Having insurance can provide access to a broader range of care choices, including high-quality facilities and in-home services that might otherwise be unaffordable. It also allows policyholders to make care decisions based on preference rather than financial limitations.
• Relieves burden on family members: Without coverage, family members often become caregivers, which can be physically and financially challenging. LTC insurance helps pay for professional care, reducing the strain on loved ones.
• Potential tax advantages: Premiums for qualified LTC insurance policies may be tax-deductible, depending on age and tax filing status. Additionally, benefits received from a policy are generally not considered taxable income.
• Inflation protection options: Many policies offer inflation protection, ensuring that benefits keep pace with rising care costs over time.

Cons of Long-Term Care Insurance

Most of potential drawbacks to long-term care insurance are tied to costs. Here are details on that and other cons:

• Cost is a significant issue. To buy $165,000 worth of long-term care coverage in 2022, a 55-year-old man would pay an average of $2,220 per year. Premiums are lower for women and go up for older policyholders or as the dollar amount of coverage increases.
• Rising premiums. Insurers can periodically raise premiums for groups of insured people, although not individuals, if they get approval from state insurance regulators. One-time rate hikes of 20% to 40% can occur.
• It may not cover all expenses. Policies only pay for certain services, including those associated with activities of daily living like eating and bathing. Coverage is also generally capped at a dollar amount and is limited to a period of time, usually no more than five years.
• Loss of premiums. If you don’t need long-term care, your years of costly premiums will be spent for no benefit except peace of mind.
• Qualifying can be an obstacle. If you are already in poor health when you apply for long-term care insurance, the costs will be higher and you may not be able to get coverage at all.

Is Long-Term Care Insurance for You?

Long-term care insurance is not necessarily right for everybody. Those with significant assets and sufficient income to pay for long-term care may be most suitable for long-term care coverage. It may not be as good of a fit for someone with limited assets whose income may not support years of increasing premiums.

Long-term care insurers often quote a finding that nearly 70% of people will need some sort of long-term care ¹ , along with a reference to the high annual costs of care in a skilled nursing facility. This implies that a large majority of people will need to pay several thousand dollars a month, potentially for many years.

However, the figure for long-term care use includes the 59% of people who, according to the U.S. Department of Health and Human Services, need unpaid care at home. This may include help from a relative with housekeeping or cooking. Only 35% of people spend any time in nursing facilities, where the average stay is one year. And, according to the American Association for Long-Term Care Insurance ² , half of all people who purchase long-term care insurance never use it at all.

Alternatives to Long-Term Care Insurance

A number of alternatives to purchasing long-term care coverage exist. One common alternative to long-term care insurance is paying for care out of pocket using personal savings and investments. This approach offers flexibility and avoids ongoing premium costs, but it requires significant financial resources to cover potentially high and unpredictable care expenses. For individuals with substantial assets, self-funding may be a viable option, though it carries the risk of depleting savings over time.

Health savings accounts (HSAs) can be a tax-advantaged way to prepare for future healthcare costs, including certain long-term care expenses. Contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are also tax-free. While HSAs may not fully cover extensive long-term care needs, they can play a supportive role in a broader funding strategy.

Some life insurance policies include long-term care riders or combined benefits, allowing you to access funds for care if needed. These hybrid policies can appeal to individuals who want coverage but are concerned about “use it or lose it” insurance premiums. If long-term care isn’t required, beneficiaries may still receive a death benefit, offering more flexibility than traditional standalone policies.

For those with limited assets, Medicaid may cover long-term care costs, particularly for nursing home care. However, eligibility is based on strict income and asset limits, and planning ahead is often necessary to qualify. Medicaid planning strategies may involve legally restructuring assets, but they require careful coordination with legal and financial professionals.

Bottom Line

Long-term care insurance can provide valuable protection, but it isn’t the only way to prepare for future care needs. From self-funding and HSAs to hybrid policies and Medicaid planning, each alternative comes with its own tradeoffs in cost, flexibility and risk. The right approach depends on your financial situation, health outlook and family support system. By weighing the pros and cons of each option, you can build a plan that helps protect both your assets and your quality of care later in life.

Long-Term Care Insurance Tips

• Before you decide whether to purchase long-term care insurance, consider talking it over with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you’ve decided that long-term care insurance is right for you, you’ll want to move forward with selecting a provider and policy. Before doing so, be sure to review SmartAsset’s list of the top long-term care insurance providers.
• You can’t always control whether or not you will need long-term care, but you can impact your costs as you age by selecting a low-cost place to live. SmartAsset’s Cost of Living Calculator can help you make that decision.

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