Insurance Basics Part 4: Long-term Care Insurance & The Long-term Care System

by Dean on May 26, 2026
Posted in Investing, Personal Finance

The following is not financial or tax advice. Please consult a CPA or investment professional before making tax or investment decisions.

Background

Long-term care and long-term care insurance are complex topics. Whether it makes sense for you or your family to acquire long-term care insurance depends on your financial and medical circumstances. Whether you decide to purchase long-term care insurance or not it is good to educate yourself on the long-term care options and costs so that you are able to make better decisions when you have to deal with managing care for you or your loved ones.

According to the US Department of Health and Human Services (HHS), approximately 49% of men and 64% of women reaching 65 today will need significant long-term care (in-home nurse, assisted living, skilled nursing home, memory care etc.). In 2022 about 6.1 million Americans had long-term care policies and according to the American Association for Long-Term Care Insurance, in the same year approximately 345,000 Americans received long-term care insurance claims.  Long-term care insurance pays for care in the event that the insured needs assistance with at least two Activities of Daily Living (ADL) including bathing, dressing, mobility, eating, continence (controlling bowels) and using the toilet (getting to and from) or has significant cognitive impairment as certified by a healthcare professional.

Although I have not done a comprehensive study on the matter, I can say with a high degree of confidence that most insurers that wrote long-term care insurance regret it. Care for the elderly is one of those rare industries where everyone involved has done poorly. Senior living facilities have had horrible financial returns, staff are paid little relative to the extreme difficulty of the job, and  the residents themselves don’t often get fantastic care. Premiums have also risen significantly on new and existing policyholders. The cost of long-term care has also been increasing more rapidly than inflation.  

Length and all in cost of care

According to a 2022 research study commissioned  by the department of Health and Human Services, the average duration of long-term care is 3.6 years for women and 2.5 years for men. Using the $6,200 median cost for Assisted Living below results in an approximate total lifetime cost of $267,840 for women and $186,000 for men. Using a median combined with an average skews the resulting number. In addition, people with greater medical needs, especially those with Alzheimer’s disease or dementia will require more expensive care and even those with lesser medical needs may spend some time in more expensive skilled nursing facilities. People with significant disabilities including Alzheimer’s, dementia, immobility and other ailments needed an average of 5.6 years of care for women and 5.1 years for men.

Miliman consulting estimates a lower cost of $171,000 for women and $98,000 for men. It is worth noting that these figures largely omit the significant amounts of unpaid care that family members provide. The same HHS study estimates that unpaid family care for older adults with significant disabilities receive care worth $204,000 on average.

Source: Milliman Consulting

Types of long-term care and median monthly costs

There are six basic types of long-term care. Unless otherwise stated, the costs cited below are from CareScout’s 2025 estimates. Note that I cite median costs, but the actual cost will vary significantly by state. As a general rule, the more expensive the state, the greater the level of medical care needed, and the more luxurious the facility, the higher the cost. For example, independent living can vary from $1,200 to upwards of $6,000+ a month.

  • Adult daycare
    • Caregivers may have full-time jobs and need a location for their elderly parents to go for the day.
    • Social care
      • The elderly are supervised and have daily activities.
    • Medical
      • Supervised and daily activities plus medication management and nursing care. Medical adult daycare is typically more costly due to the need to hire nurses.
    • Median monthly cost: $2,058.
  • At home care
    • Homemaker services
      • You are otherwise in good health, but need help completing household tasks.
    • Home health aid
      • A home health aid helps with daily tasks such as bathing, dressing, grooming, and basic health related services.
  • Independent living
    • Apartments where meals and activities are in a central location. There are some nurses on staff, but the residents are usually younger and in better health.
    • Not usually covered by long-term care insurance
  • Assisted living
    • The elderly individual needs help with two or more daily tasks. There is a nurse for every few rooms.
      • Median monthly cost: $6,200
  • Skilled nursing
    • Elderly people with significant medical needs that are recovering from a recent injury or illness and recently left a hospital will often go to skilled nursing facilities. These facilities have 24-hour nursing care, help manage therapeutics/medications, and have a higher ratio of nurses to rooms than assisted living facilities. Skilled nursing facilities stays are usually shorter than at other facilities. Once the individual has recovered or improved his or her health, they usually go to less expensive facilities with lower levels of care.
      • Median monthly cost: $9,581 for a semi-private room or $10,798 for a private room.
  • Memory Care
    • Memory care is for people with dementia, Alzheimer’s disease, or other forms of cognitive decline. These facilities have high staffing levels and usually have more significant security to prevent patients from wandering away.

Coverage costs and key factors

The cost of coverage will vary largely based on five key factors below. All figures are from the American Association of Long-term Care Insurance’s 2025 Price Index unless otherwise noted.

  • Your age
  • The policy benefit amount or benefit pool
    • Equal to daily/monthly maximum and benefit period
  • The annual benefit growth rate
  • Your health
  • Your family history

The older you are when you get the coverage, the higher your annual premium payments. In 2025, the average cost of a $165k policy with level benefits for a male/female/couple at age 55 was $950/$1,500/$2,080. At 65 the same policy cost for a male/female/couple were $1,750/$2,700/$3,750.

The higher your total benefit, the more you pay for it. Policies usually have a maximum monthly or daily maximum benefit and a benefit period. If you multiply one by the other you get the policy benefit.

A level policy benefit is the cheapest and simplest, you receive a flat benefit amount that is comprised of your monthly or daily maximum benefit multiplied by the maximum benefit period. More expensive policies have policy benefits that increase by a given annual amount typically 2-5%. The higher the annual growth in benefits the greater the policy’s cost. For example, a level policy benefit of $165k for a male/female/couple at age 55 was $950/$1,500/$2,080 in 2025 compared with $1,750/$2,855/$3,875 for a 2% annual increase and $3,710/$6,400/$8,575 for a 5% annual increase.

The inflation rate in long-term care has generally exceeded inflation overall. According to Morningstar citing the Bureau of Labor Statistics, the inflation rate in long-term care and adults services was 3.7% in the decade prior to 2024 vs roughly 2.8% in the overall US economy. If your goal is to ensure that the majority or all of your long-term care needs are met with a policy, you may need to consider paying more for a policy with annual increases that will do a better job of keeping pace with inflation.

Unlike health insurers, long-term care insurers are allowed to discriminate based on pre-existing conditions. In addition to existing Alzheimer’s, dementia, or other forms of cognitive decline/impairment, less obvious health risk factors such as obesity or diabetes can also potentially be grounds for denied coverage or for placement in higher risk, more expensive insurance tiers. Terminal illness and substance abuse can also result in denial of coverage. Another grounds for disqualification is being unable to perform one or more activities of daily living. The assumption is that you cannot already do one, there is a high likelihood you will be using coverage in the near future. The result of all these potential grounds for denials is an extremely high rejection rate. According to the New York Times, in 2021 approximately 20% of applicants in their 50s, 30% ages 60-64, and 47% of those 70-74 were denied long-term care coverage.

Your family history can also have a significant impact on whether you can obtain coverage and the premium you pay. A history of dementia, Alzheimer’s, debilitating disease, cancer, cardiovascular disease or other major ailments can all make it more difficult to obtain coverage on a cost-effective basis.

Other important policy variables

Not all policies with the same benefit amount are created equally, there are several other critical variables to consider:

  • Elimination period
    • Policies have a 30, 60, 90, or 180 day exclusion period during which the insured pays the costs of care. The longer the elimination period the cheaper the insurance, but the more you will pay out of pocket before coverage kicks in.
  • Reimbursement vs. indemnity
    • Under a plan with reimbursement you pay costs and then submit them for reimbursement. Indemnity plans pay a fixed amount per day once triggers are met. An indemnity plan is usually more expensive and has some tax ramifications, namely that any amounts over the IRS per diem of $430 per day in 2026 result in income to the insured and the need to file IRS tax form 8853. If for example you get indemnity payments of $450 a day, the additional $20 over $430 will be taxable to you.
  • Facility type: Facility, home health care, and comprehensive
    • Historically plans have either been facility care or home health care policies. Under the former the policy pays for care at a skilled nursing, an assisted living, or a memory care facility. Home health care policies provide for care in the insured’s home. Most policies are now comprehensive policies that include both facility or home health care.
  • Benefit triggers
    • All plans have some kind of trigger related to not being able to do two or more of the ADLs. Where they differ materially is in their definitions of cognitive impairment. Most plans use some variant of “severe cognitive impairments” that require “substantial supervision.”

Buyer beware

Long-term care insurance has been a loss generating machine for insurers. If insurers are systematically underpricing policies there is a risk that they may increase your policy premiums even if you have a level premium policy. Although an insurer cannot just raise your policy premium, they can raise premiums on the entire class of a particular policy if the increase is approved by state insurance regulators. This has occurred a number of times with long-term care policies that were significantly underpriced in the past. Insurance regulators will often approve the increase as the alternative may be that the insurer becomes insolvent and cannot pay out policy benefits. Usually an insurer will give you options like reducing your daily benefit, removing benefit growth rates, taking a cash payout, and increasing waiting periods that may be preferable to paying the new rate or terminating coverage.  

As is the case with all insurance, make sure you are purchasing from a reputable insurance company with a strong AM best rating. As can be seen below, the score is simple and follows grades, with an A+ being the best and D the worst.

Source: Bankrate

Who should get long-term care insurance

Long-term care is unique because it is one of the few insurance policies that you sometimes purchase for someone else. Normally you are purchasing long-term care for you, your parents, or in-laws. According to the HHS study cited above, approximately 55% of the population over age 65 does not use paid long-term care at all.  Why then should you potentially get long-term care insurance? You are effectively paying for “tail risk” or the possibility that you have to pay for expensive care for several years. The odds you have a tail risk event increases if you have a history of Alzheimer’s or dementia that will potentially necessitate memory care.

Long-term care makes sense to acquire under a few scenarios:

  1. Your net worth is between $500k-$3 million or you and your family would lack the means to pay for care if you or your loved ones need it
  2. You have a family history of Alzheimer’s, dementia, or other debilitating diseases such as Parkinson’s or Huntington’s disease.   

Net worth considerations

Your net worth is a major determinant of whether or not you should get long-term care insurance. Given the aforementioned average cost of care is somewhere between $98,000-186,000 for men and $171,000-267,000 for women and according to the Federal Reserve, in 2023 the median savings of a 65-74 year old is $200,000 (average $609,230), most people DO NOT have a net worth where a long-term care policy may make sense. At these levels of wealth it makes sense for you to spend down your assets and use Medicaid as is outlined in a separate section below.  

If you have a net worth greater than $3 million you can likely easily pay the cost of long-term care for yourself, your spouse, or one or more of your parents without significantly impacting your retirement plans. If, however, you have a net worth that is between $500k – $3m million outlaying a few hundred thousand dollars can impact your ability to meet your retirement objectives by significantly decreasing your nest egg.

Alzheimer’s disease

The most expensive form of long-term care is memory care. Unfortunately, my grandmother had Alzheimer’s and I saw first hand how it shatters people. Every promising cure has largely failed or provided a delay in Alzheimer’s onset at a significant cost. I hope that it is eventually cured, but for now if you have a history of Alzheimer’s disease you should strongly consider long-term care insurance, unless you have a significant net worth in excess of $3m.

The Alzheimer’s Association has a great factsheet that can help you understand Alzheimer’s if someone in your family has it or is likely to get it. Some facts derived from this factsheet about Alzheimer’s disease are critical to understanding the potential financial costs associated with it:

  • Alzheimer’s is a subset of dementia and accounts for 60-80% of the total dementia cases. Dementia is a group of symptoms that regularly occur together.
  • About 1 in 9 people or approximately 11% of people age 65 and older have clinical Alzheimer’s dementia. However, this percentage increases with age, “Among those age 65 to 74, 5.2% have Alzheimer’s dementia; age 75 to 84, 13.8%; and age 85 or older, 35.8%
  • Most people afflicted with Alzheimer’s live 4-8 years, but some can live as long as 20 years.
  • Alzheimer’s is caused by a combination of environmental and genetic factors, but one gene variant known as e4 is associated with higher rates of Alzheimer’s. “For example, based on data from a study in Europe and a study in the United States, of people age 65-69, the risk of developing dementia by their early to mid-80s was 5% to 7% among those with no copies of the e4 form, 15% to 16% among those with one copy, and 31% to 40% among those with two copies.” White and black Americans have the highest prevalence of two copies of e4 with 6.6% and 5.7% respectively. Hispanics and native Americans have a lower percentage with 3.3% and 1-1.2% respectively. White and black Americans also have a higher percentage of one e4.

How to trigger coverage

In order for the coverage to start kicking in you must need assistance with two or more activities of daily living (ADLs) as certified by a medical professional or have severe cognitive decline. Coverage will usually start once a physician certifies the insured’s condition and recommends a type of care. In the event of significant cognitive decline, it may be necessary to obtain neuropsychological testing. Some insurance companies may also require an assessment by a nurse they choose to assess the insured’s need for physical or cognitive care. If possible try to stay with the individual that needs care during the assessment to avoid misleading questions.

Medicare

Medicare has a handy guide to under what circumstances and how much is covered here. Most long-term care is NOT covered by Medicare because most of the care received in a long-term care facility is related to assistance with the activities of daily living. However, because skilled nursing is mostly medical care, Medicare will fully cover days 1-20 and require co-pays of $217 a day on days 21-100. After day 100 you pay 100% of the costs. Compare this daily cost with the $314 a day median cost of a semi-private room and its clear that getting Medicare to pay for the stay results in significant savings. Private health insurance will often offer similar coverage with a comparable 100-day benefit period, but it will vary by policy.

Skilled nursing facilities are covered under Medicare Part A which most people have access to if they or their spouses worked and paid Medicare taxes. Medicare also requires that you have an inpatient hospital stay of at least 3 days in a row as an inpatient prior to receiving coverage and time spent in an emergency room doesn’t qualify for the 3-day minimum. Under Medicare each stay is subject to a “benefit period”.  The benefit period begins when you are categorized as an inpatient and ends when you haven’t gotten any inpatient care for 60 days in a row. If you are readmitted after a benefit period ends another benefit period can start and you will receive full coverage the first 20 days.

Sometimes long-term care insurance covers hospice, but it usually doesn’t. Hospice care is potentially covered by Medicare. If you have a terminal illness and a physician certifies your life expectancy is 6 months or less, Medicare Part A will pay for hospice care. After 6 months you can continue to get hospice care as long as the hospice medical director or hospice doctor recertifies that you are terminally ill. Go here for more information about Medicare’s hospice coverage.

Medicaid and financial requirements

Medicaid is by far the largest payor for long-term care. In 2020, over 30% of the almost $600B in total Medicaid spending was on long-term care services. Instead of using the term long-term care, Medicaid uses the term long-term services and supports (LTSS). Medicaid has fairly complicated rules, but the core idea is that you are only eligible to use Medicaid if you have low income and do not have significant assets. There are exceptions outlined below, but Medicaid is intended for people who cannot afford care with their own income and assets. 

Medicaid is a Federal program, but administered by states which have different but largely similar financial requirements:

  • Income limit of $2,982 for an individual or $5,964 per month for a married couple in most states. Any income you receive including pensions and social security must go to Medicaid to help pay for your care.
    • If you exceed the income threshold, a “miller trust” is one possible means of qualifying in the 25 states that allow it. Income above the eligibility limit is placed into a trust with someone other than the Medicaid applicant as the trustee and the state they are receiving the care in as the beneficiary. When the applicant dies, the state receives the funds in the trust up to the cost of care. The applicant can also take a small personal needs allowance that varies by state, but is usually between $30-$160 per month. Spouses can also receive a monthly maintenance needs allowance that is a maximum of $4,066 a month.
  • Single individuals must have $2,000 and couples $3,000 or less in countable resources or assets.
    • Your personal residence (see next bullet) is normally excluded.
    • There is typically a “5 year lookback” on assets although some states such as California (30 months) can be shorter. If you plan on moving assets from your estate to qualify for Medicaid, you have to transfer assets 5 years or more prior to entering a facility and applying for Medicaid.
  • Federal home equity limits of $752,000 on your primary residence in 2026. Historically states could set higher limits, but in 2025 legislation capped the amount at $1m starting in 2027. These limits mean that you can keep the equity in your home as long as it is below the $752,000 limit and not hand it over to Medicaid.

Spouses have separate rules

Medicaid has specific rules called impoverishment protections, which are meant to continue supporting spouses while their husband or wife is in a nursing home.

  • Home equity limits do not apply if you have a spouse, a disabled person, or minor children living in the home and exceptions also exist for “undue hardship”.  
  • Spouses can keep between $31,584-$157,920 in assets and between $2,644-$3,948 in income per month depending on the state. The spouse receiving care can also transfer some or all of their income to the spouse that is remaining at home. Only the applying spouse’s income is counted towards the limit.

How Medicaid works and what it pays for

Skilled nursing is generally covered by Medicaid for people that meet Medicaid’s financial eligibility requirements. Medicaid will pay the difference between a skilled nursing home and your required monthly income contribution.

Assisted Living is usually covered by Medicaid in most states (Alabama, Kentucky, and Louisiana are exceptions), but it is significantly more complicated. Most states require a Home and Community Based Services Medicaid Waiver and need a Nursing Facility Level of Care (NFLC) to receive in-home or in community (assisted living) care. States usually determine whether an applicant needs a NFLC based on similar criteria to long-term care insurance including an inability to do two or more Activities of Daily Living, major medical needs, cognitive impairment, and behavioral problems that are usually associated with dementia. Also importantly, unlike nursing home Medicaid where if you qualify states have to provide coverage, HCBS waivers are not an entitlement and therefore states can cap enrollments, resulting in waiting lists.

State coverage for Assisted living is more limited and only covers care-related services, NOT rent, meals, and housing. This may seem like a Catch-22 of sorts because you can only get on Medicaid if you don’t have significant assets or income, but you can only use Medicaid for Assisted Living’s care related services. States try to make up this gap by limiting the amount facilities can charge for room and board and to the maximum monthly Supplemental Security Income (SSI) of $994 in 2025. SSI are supplemental social security payments for people with disabilities. Family members can also assist with paying for room and board or in some cases even pay for an upgrade to a private room under what is called “family supplementation”. Rules on what forms of family supplementation are permitted vary considerably by state and there is not a single website that provides links to all the states eligibility rules so Google your individual state’s rules and consider speaking with an attorney who specializes in elderly care.

Although approximately 1 in 5 assisted living residents rely on Medicaid, not all assisted living facilities take Medicaid. In general assisted living facilities can be very tough places to visit and may not be the most well-maintained facilities in the world even when they are “private paid” (cash or long-term care insurance rather than Medicaid). When I was a teenager my grandmother was in a Medicaid paid facility. Although she was perfectly happy, it was not a great place to be and if we had the means we would have put her somewhere else. I am sure there are great Medicaid facilities, but based on my admittedly limited experience, if you can afford a private pay facility, it is usually preferable to a Medicaid facility.  

In home care is usually covered by Medicaid. Medicaid will cover costs associated with a broader list of ADLs including the six basic activities, but also shopping for essentials, laundry, light housekeeping, and meal preparation. A list of potentially covered services from the American Council on Aging is available here.

Medicaid’s memory care coverage is similar to its coverage for skilled nursing and assisted living facilities as well as in-home care. Skilled nursing and the care portion of in-home care are usually 100% covered, but only the care portion of memory care and not the room and board are covered by Medicaid.

Veterans

Three kinds of veterans are unlikely to benefit from long-term care insurance including those with high service-connected disability rating, who have low assets and are likely to qualify for Medicaid, and wealthy veterans who have a significant net worth in excess of a few million dollars. Under some circumstances Veterans Administration will pay for some forms of long-term care including nursing homes, assisted living, and adult day care. Whether you qualify for care will depend on a number of variables including your service history, disability status, and other variables. In addition to potential reimbursement, the VA also runs their own nursing homes.

Some veterans may also qualify for tax free Aid and Attendance payments which are enhanced VA pension benefits that can help assist with long-term care. The Aid and Attendance payments are also means tested, meaning you do not qualify if your income plus net worth is over $163,699 in 2026. These payments start at $2,400 for a single veteran and can go up to $4,000+ for two married veterans.  

Taxes

There are a number of tax considerations with long-term care and long-term care insurance policies. Historically some plans were non-tax qualified, but now the vast majority of plans are tax-qualified. Your premiums are deductible if your total spending on medical expenses exceeds 7.5% of your adjusted gross income. If you meet this threshold then the IRS has a maximum amount you can deduct every year based on your age that varies from $470 at age 40 or under to upwards of $5,880 at age 71. If your employer pays a part of your premium, their contribution needs to be reported as taxable income.

Business owners have unique ways of making long-term care insurance payments on a tax advantaged basis using above the line deductions. If you own a C-Corporation you can provide long-term care insurance to yourself without giving other employees the same benefit and deduct the premiums. Sole proprietors and LLC owners can use section 105 Health Reimbursement Arrangements to deduct the lesser of their premium or the maximum amount you can deduct based on the IRS maximum for your age.  

Reimbursement policies benefits are excluded from federal income. As mentioned above under Other Important Policy Variables, indemnity policies may be subject to taxation above the IRS daily per diem of $430 in 2026. If you do not have long-term care insurance and pay out of pocket, expenses in excess of 7.5% of your Adjusted Gross Income are usually deductible.

Hybrid policies

Long-term care insurance is now sometimes sold in bundled policies with life insurance or an annuity. In most circumstances you get a better deal by having standalone policies rather than combining multiple forms of insurance. The additional total premium you pay by purchasing combined life and long-term care insurance is usually higher than you would pay for the same benefit level. Your “insurance leverage” is lower meaning for every dollar you pay out you are not getting as much protection, but you partially make up for it in some plans by having a cash balance you can withdraw. One other upside of these hybrid plans is that they often have the benefit of fixed premiums which avoids the class-wide increases that many long-term care plans have been subject to. Annuities will be covered in another article, but usually produce suboptimal returns relative to other investment options. 

Conclusion

Long-term care insurance is a great form of insurance for people with net worths between $500k – $3m and those with a family history of dementia, Alzheimer’s disease, and major medical issues. People with a lower net worth are likely better served by relying on Medicaid and those with greater than $3m in net worth are usually better off paying out of pocket. The average cost of care is usually somewhere between ~$100-250k, is higher for women than men because they live longer, and is greater if you develop dementia or Alzheimer’s. Pay attention to all the details in a prospective long-term care policy, but especially the annual increase, elimination period, payment type, and benefit triggers. Using Medicaid can result in significant savings, but requires you to do significant financial planning or risk having to forfeit virtually all of your assets and income.

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