How Families Actually Pay for Long-Term Care
Reinforcing the Reservoir of Wealth You Built Over a Lifetime
In 1976, the Teton Dam in eastern Idaho collapsed.
Within hours, a massive wall of water tore through the valley. Entire communities were forced to evacuate. Homes, farms, and businesses were destroyed in its path. More than 35,000 people were forced from their homes, and 11 people lost their lives. The damage stretched for miles.
The dam had been built to hold back an enormous reservoir of water. For years it appeared stable and secure. But once cracks began forming within the structure, the pressure behind the dam eventually became too much. When the failure finally occurred, the release of water was sudden and devastating.
In many ways, retirement savings can look a lot like that reservoir. For decades you work, you save, and you build a financial foundation meant to support the rest of your life. But sometimes a crack forms in the dam.
One of the most common—and most financially destructive—cracks in retirement planning is the cost of long-term care caused by chronic illness.
According to the U.S. Department of Health and Human Services, about 70% of Americans age 65 and older will need some form of long-term care during their lifetime:https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
What Defines Long-Term Care?
Before discussing how to pay for care, we must first understand what actually triggers the need for long-term care.
Contrary to what many people believe, long-term care is not primarily about medical treatment. Instead, it is about losing the ability to live independently. Insurance companies and care providers determine this through what are known as the six Activities of Daily Living (ADLs).
These activities represent the essential functions required to maintain personal independence:
- Transferring — moving from bed to chair
• Toileting
• Bathing
• Dressing
• Eating
• Continence
When a person can no longer perform two of these six activities without assistance, or requires supervision because of cognitive impairment such as Alzheimer’s disease or dementia, they are typically considered eligible for long-term care benefits.
You can learn more about how long-term care is defined through the National Institute on Aging:https://www.nia.nih.gov/health/long-term-care/what-long-term-care
Chronic Illness: The Real Cause of Long-Term Care
Long-term care needs are most often caused by chronic health conditions, not sudden accidents.
Some of the most common illnesses that eventually lead to long-term care include:
- Heart disease
• Hypertension
• Atrial fibrillation
• Diabetes
• Kidney disease
• Chronic obstructive pulmonary disease (COPD)
• Osteoarthritis
• Rheumatoid arthritis
• Parkinson’s disease
• Stroke
• Cancer
• Alzheimer’s disease
• Dementia
Most know families who have already experienced these challenges through parents, relatives, or friends.
These conditions gradually reduce mobility, strength, or cognitive ability until a person can no longer safely live independently.
When Long-Term Care Typically Begins
Many people assume long-term care only occurs in extreme old age. The reality is somewhat different.
Statistically:
- About half of long-term care claims begin in a person’s 80s
• Roughly one-quarter begin in a person’s 70s
Once care begins, it often lasts three to five years, although some cases extend much longer. Data from:https://www.aaltci.org/long-term-care-insurance/learning-center/long-term-care-statistics.php?
The Financial Pressure Behind the Dam
The cost of long-term care can be staggering. Typical national averages today include:
- $5,000 – $8,000 per month for in-home care
- $6,000 – $9,000 per month for assisted living
- $120,000 or more per year for skilled nursing care
When care lasts multiple years, families can easily face $300,000 to $500,000 in total expenses for a single individual. Unfortunately, many families do not discover this financial reality until they are already in the middle of a health crisis.
Another common misconception is that Medicare will pay for long-term care. In reality, Medicare typically covers only short-term rehabilitation after hospitalization—not extended custodial care.This means long-term care expenses often come directly from personal retirement savings.
Now we turn to the question every family eventually asks:
How do families actually pay for long-term care—and how can modern planning strategies reinforce the dam protecting the reservoir of wealth you built over your lifetime?
The Hidden Tax Problem
When families begin paying for care, they often withdraw money from pre-tax retirement accounts such as IRAs or 401(k)s. These withdrawals are usually fully taxable as ordinary income.
For example, if someone needs $120,000 to pay for care, they may need to withdraw $150,000 to $160,000 from their retirement accounts in order to cover both the care costs and the associated taxes. In other words, the cost of care is not just the bill itself. Taxes can increase the financial damage by 20% to 30%. When this happens, the reservoir of wealth behind the dam begins experiencing an uncontrolled release of funds.
You can compare the costs in your state by visiting this site:https://oneamericaltcmap.hvsfinancial.com
Reinforcing the Dam with Asset-Backed Long-Term Care Strategies
Fortunately, modern financial planning strategies offer ways to reinforce the dam protecting your wealth before cracks form. One of the most effective approaches is known as asset-backed long-term care planning. Instead of paying premiums into traditional “use-it-or-lose-it” insurance policies, these strategies reposition an existing asset—such as cash, CDs, brokerage funds, or annuities—into financial structures specifically designed to fund long-term care.
One of the most compelling advantages of these strategies is leverage. In many cases, the amount available for long-term care can be multiplied by two to three times the original asset value, sometimes creating a 300% pool of care funding. But leverage is only part of the story.
The Pension Protection Act Advantage
In 2006, Congress passed the Pension Protection Act, which introduced important tax advantages for certain long-term care planning strategies.This legislation allows qualifying life insurance policies and annuities with long-term care riders to pay benefits tax-free when used for qualified long-term care expenses under Internal Revenue Code Section 7702B.
Additional information can be found through the IRS here: https://www.irs.gov/taxtopics/tc502
This creates a powerful combination:
- Leverage of assets for care funding
- Potential tax-free long-term care benefits
Together, these advantages can significantly reduce the financial pressure long-term care places on a retirement plan.
Two Primary Types of Asset-Backed Solutions
Asset-based long-term care strategies are typically structured using one of two financial frameworks.
Hybrid Life Insurance Strategies
These policies combine life insurance with long-term care enhancements. If care is needed, the death benefit can be accessed as well as a prolonged continuation of benefits to pay for needed support tax free. If long-term care is never needed, the life insurance benefit can still pass to heirs tax free.
Hybrid Annuity Strategies
Where health or age is a concern, another approach involves annuities that specifically built for long-term care. Some of these solutions are guaranteed issue. In these structures, the annuity value can be used to reposition an asset you already own where it is enhanced through leverage to create a larger pool that can exceed 300% of money dedicated to care costs. If long-term care is not needed, your asset and any growth returns to your estate.
These structures eliminates the “use-it-or-lose-it” concern many people have about traditional long-term care insurance.
A Real-World Example of Leverage
Many people ask what these strategies actually look like in practice. Consider a hypothetical example based on real carrier offerings. Repositioning $170,000 into an asset-backed long-term care strategy could potentially create a $525,300 pool of long-term care benefits. That could provide approximately $8,755 per month for five years, paid tax-free for qualified care expenses. If an inflation rider is included, the benefit pool may grow significantly over time. For example, after ten years the available benefit pool could exceed $689,486, further protecting the retirement nest egg.
And if a health crisis never occurs?
The underlying asset may still grow and pass to beneficiaries—for example $240,492 to heirs instead of being lost as unused insurance premiums.
Funding Strategies Over Time
Not every family is able to reposition a large lump sum. Fortunately, other options exist. Some strategies allow assets to be repositioned gradually over time. For example, a couple may choose to build a $628,229 pool of long-term care protection by allocating $20,000 per year for ten years, totaling $200,000. In this case, the strategy may provide approximately $8,300 per month in care benefits for six years, covering both spouses under one plan. After the funding period is complete, the protection remains in place for life.
This type of structure can provide significant leverage while allowing families to reposition assets in a more tax-efficient manner.
Compliance Disclaimer
Examples discussed in this article are hypothetical and for educational purposes only. Illustrations referenced are based on carrier offerings but do not represent any specific policy or guarantee of future results. Actual benefits, premiums, underwriting classifications, and policy features will vary based on age, health, insurer, and policy design. Guarantees are subject to the claims-paying ability of the issuing insurance company.
Why Professional Planning Matters
Asset-backed long-term care strategies are not one-size-fits-all solutions. Selecting the right structure requires a deep understanding of a family’s complete financial picture.
At Guided Seasons Wealth Advisors, we spend several hours across multiple visits educating families and evaluating the strategies that best match their goals and circumstances. The process begins by creating a comprehensive financial snapshot, organizing the key elements of a client’s financial life.
This includes evaluating:
- Income sources
- Investment assets
- Tax exposure
- Monthly expenses
- Retirement goals
- Legacy objectives
- Potential healthcare risks
From there, we evaluate various planning strategies to determine which solutions best align with the family’s long-term goals. The right strategy for one family may be completely different for another. Much like a chessboard, every financial decision affects another and it requires a fiduciary to really understand the goals, financial circumstances, and skillful evaluation to recommend solutions in the best interest of the client.
Protecting the Reservoir of Wealth
Ultimately, the goal of these strategies is not simply buying insurance. The real goal is protecting the reservoir of wealth you spent a lifetime building. Through careful and comprehensive planning, families can reinforce the structure around their retirement assets and reduce the risk that a healthcare crisis drains decades of savings.
At Guided Seasons Wealth Advisors, our life’s work is helping families achieve financial peace of mind. And the families who plan ahead are often the ones who sleep better at night—especially when life presents unexpected health challenges.
I hope this discussion helps you reevaluate your own retirement planning and consider ways to strengthen the financial dam protecting your future.
Frequently Asked Questions About Paying for Long-Term Care
How do most families pay for long-term care?
Most families pay for long-term care using a combination of personal savings, retirement accounts, home equity, long-term care insurance, Medicaid planning, and asset-based long-term care strategies.
Does Medicare pay for nursing home care?
Medicare typically covers only short-term skilled nursing or rehabilitation following hospitalization, not extended custodial care. Most long-term care costs must be paid privately unless someone qualifies for Medicaid.
What is asset-based long-term care insurance?
Asset-based long-term care strategies use life insurance or annuity products with long-term care riders. These strategies allow individuals to reposition assets to create a leveraged pool of funds dedicated to future care expenses.
What is the Pension Protection Act for long-term care?
The Pension Protection Act of 2006 allows certain life insurance policies and annuities with long-term care riders to pay benefits tax-free when used for qualified long-term care expenses under IRS Section 7702B.
How much can long-term care cost in retirement?
Long-term care costs vary widely by location, but national averages often exceed:
- $5,000–$8,000 per month for home care
- $6,000–$9,000 per month for assisted living
- $120,000 per year for skilled nursing care
Costs can easily exceed $300,000–$500,000 over several years of care.