Watch This Lesson
For most of a working life, the big money goes to two things: the mortgage and the kids. The plan is that both eventually end. They usually do — and then something else moves into the space they vacated.
By the time we get into our senior years, hopefully the mortgages are gone or dwindling and the kids are self-sufficient, unless we have the boomerang ones that we throw out and they keep coming back. But for the most part, our health care cost will be our greatest expense the older we become.
What makes healthcare different from a mortgage is that you cannot amortize it. A mortgage has a known total and an end date. Healthcare has a rising cost curve and no way to know where you personally land on it. You might be hiking at ninety. You might need skilled nursing at seventy-two. The planning has to work either way.
We know Medicare goes up every year. Pharmaceutical costs go up every year. The cost of long-term care is through the roof. And then just general health care in whole, it gets more and more catastrophic and astronomical every year.
The Question Behind the Question
Most people ask what healthcare will cost in retirement and whether Medicare covers it. Underneath that sits an assumption — that a decent nest egg plus Medicare plus family support will absorb whatever comes.
The question that actually determines the outcome is different: if long-term care becomes necessary, where does that money come from, and is there a way to cover the risk without surrendering capital you may never need to spend?
Medicare, it is worth saying plainly, does not pay for extended custodial long-term care. It covers limited skilled nursing after a qualifying hospital stay. The years of daily help that long-term care actually means are not a Medicare benefit.
Three Ways People Handle It
Pay for It Yourself
Some people just self-insure. They’ve got enough assets. They say, if my health ever fails, I’ll just pay it out of what I’ve got. I got plenty of assets. Yeah, it means my kids get less at the end, but I’m good.
For someone with real liquidity, this is a legitimate choice, and it has the advantage of total flexibility — no premiums, no benefit triggers, no claims process.
The tradeoff is one-for-one. Every dollar of care comes straight out of the estate and does not come back. A sustained care need does not cost a fixed amount; it costs an amount multiplied by however many years it lasts.
Traditional Long-Term Care Insurance
These policies arrived in the late 1980s as the boomer generation approached retirement. You pay a monthly premium; if you need care, the policy pays a defined daily or monthly benefit.
They can work well. The structural complaint is the one Renee names:
You pay a premium every month for an expected benefit… what if you don’t? Then it’s like car insurance. It’s just money you gave to an insurance company and you never get the benefit of. So I call that use it or lose it.
There is a second issue worth knowing before you shop. The industry badly misjudged how long this generation would live and how often it would claim. Carriers responded with substantial premium increases on existing policyholders, which left people choosing between paying considerably more than they budgeted or accepting a reduced benefit. If you are evaluating a traditional policy, ask directly about the carrier’s rate increase history and whether the premium is guaranteed.
Asset-Based Coverage
The third approach is what Renee calls hedging with somebody else’s money. Rather than paying premiums, you reposition a lump sum into a policy or annuity designed around long-term care. The insurer holds the principal, and if you need care, the contract provides a benefit larger than what you put in.
We give a bucket of money to an insurance company. We say, hold this in case I ever have a health care issue. If I do, I need it back to help pay for my health care costs. But not only do I want my own money back and what you’ve been able to give me in interest and grow it while you’ve had it, but I also want some of your profits. And that is what we mean by saying we’re going to hedge against using somebody else’s money to help pay for your expenses.
The distinction that matters is what happens if you never claim:
Well, then what if we don’t need it? Then it just passes to your beneficiaries, which is what it would have done anyway… What if we use some of it? Whatever’s left passes to your beneficiaries. So that’s what we mean by long-term care hedging.
That removes the use-it-or-lose-it objection. The money is not forfeited; it is repositioned. In exchange, you are giving up liquidity and control over that lump sum, and the leverage, growth, and benefit terms vary enormously between contracts. The illustration is only as good as the contract language behind it, so the guarantees are the part to read.
What Turns the Benefit On
Long-term care benefits do not pay because you feel unwell. They pay when you meet a defined medical trigger: either significant cognitive impairment, or the inability to perform a set number of activities of daily living without help. Most contracts use two of six.
If you meet the parameters for help at home, which means you cannot do two of the ADLs, activities of daily living… bathing yourself, dressing yourself, moving yourself from couch to bed… Basically, you need help. You broke your hip. You need recovery at home. You need a home health person to come in and just help you.
The six activities of daily living are:
- Bathing — washing yourself in a tub or shower.
- Dressing — putting on and taking off clothing.
- Transferring — getting in and out of a bed, chair, or wheelchair.
- Toileting — getting to and from the toilet and managing hygiene.
- Continence — controlling bladder and bowel function.
- Eating — feeding yourself.
The same trigger generally applies whether the care happens at home, which is what most people want, or in assisted living, memory care, or a skilled nursing facility. Confirm that in the contract, because a policy that only pays for facility care is a materially different product from one that pays for home care.
Medicaid Is Not a Plan
The fallback many families assume is Medicaid: give the assets to the kids, qualify, let the program pay. It is more dangerous than it sounds, in three ways.
The look-back. Medicaid reviews asset transfers made in the years before application — commonly five, depending on the state. Transfers for less than fair market value during that window trigger a penalty period of ineligibility. Giving the house away in year four does not qualify you; it delays you.
Your assets inherit your children’s problems. Once the house is in your child’s name, it is exposed to everything in your child’s life.
Gave your house away, and then also we’ve exposed liability in case the person you’ve given away is gone, and now your house goes to somebody else unintentionally, or that person’s involved in a lawsuit, and now we lose your house to somebody else’s liability.
A lawsuit, a divorce, a bankruptcy, or your child predeceasing you can all put that house somewhere you never intended.
The state comes back. Medicaid coverage is not a gift. States are required to seek recovery from the estate of a deceased recipient for care they paid for.
Medicaid will say, we’ll take care of you, but if you die and we spent $50,000 on you and your money all ran out, now we’re coming back to the estate and we want our $50,000. That’s called Medicaid recovery.
There is legitimate Medicaid planning, done well in advance by an attorney who specializes in it. What there is not is a safe way to improvise it during a crisis.
Where to Start
- Find out what long-term care actually costs where you live — home health, assisted living, and skilled nursing are three very different numbers.
- Run the self-insuring math honestly, using three to five years of care rather than one.
- If you are considering a policy of any kind, compare a traditional premium-based product against an asset-based one, and ask specifically about rate increase history and benefit triggers.
- Confirm whether any product you are shown pays for care at home, not just in a facility.
- If Medicaid is part of your thinking, talk to an elder law attorney years before you need it, not months.
The goal here is not to buy something. It is to make sure that if you need care, it gets funded by a decision you made in advance rather than by whatever is left when the money runs short.
This article is for educational purposes only and does not constitute legal, tax, insurance, or financial advice, and it is not a recommendation of any specific product, policy, or carrier. Dollar amounts used are illustrative only. Insurance product features, guarantees, benefit triggers, costs, and tax treatment vary by contract, carrier, and state, and all guarantees are subject to the issuing company’s claims-paying ability. Medicaid eligibility rules, look-back periods, and estate recovery requirements vary by state and change over time. Consult a licensed insurance professional, a certified public accountant, and an elder law or estate planning attorney in your state before acting on anything described here.
About the instructor: Renee Parris is an estate planning educator with over 30 years of experience. This article is a companion piece to Renee’s course, Estate Planning, Simplified.
