Self-Funding Long-Term Care

Those who do not make plans to fund the long-term care they may need as they get older often end up having to pay for their care out of their own pockets because they have no alternative. Other people consciously plan to use their own income, savings, and assets to pay for care. This section looks at self-funding, discussing the problems with this approach and exploring some of the financial vehicles that can be used to fund care.

Those planning to pay for their own long-term care should consider these questions:

• Will your assets be enough to cover your long-term care needs?
• Even if your accumulated assets are sufficient, do you really want to spend them on long-term care? Wouldn’t you prefer to preserve them and pass them on to your spouse or other heirs?

As we saw in the preceding discussion, long-term care services are costly, and paying for them requires a large amount of money. Suppose, for example, that someone who is 45 years old today decides to create a fund to pay for her future long-term care needs. The average length of stay in a nursing home is roughly 2.5 years; based on the 2026 median cost of $328 per day for a semiprivate room, the total amount at today’s prices would be approximately $295,260. And if the person needs that amount of nursing home care in 40 years, when she is 85, the projected cost rises dramatically — assuming costs continue to increase by approximately 5 percent annually, the total could exceed $2,080,000. To accumulate that amount by then, she would have to save substantially more each month than earlier estimates suggested, and this does not even take into account any home care or assisted living the person might need.

Sources: CareScout/Genworth Cost of Care Survey (2025 data, published 2026); MedicaidPlanningAssistance.org (2026); SeniorLiving.org (2026).

Most people will find putting aside that much money every month extremely difficult, and doing so is not very cost-effective. And there is another problem — if a person adopts this savings plan but needs long-term care while she is still relatively young, the funds accumulated by that time may fall short of her expenses. Clearly, for most people, relying on savings and assets to pay for long-term care is not a feasible option.

A few people do have sufficient financial assets to pay long-term care costs. However, even they should ask whether they want to gamble on possibly having to pay an uncapped liability (that is, a loss that has no fixed limit). If the gamble is lost, they may have to spend very large amounts of money on care, money that otherwise could have been used to enhance their quality of life or provide for their heirs.

However, for those who are paying for their own care, there are a number of funding sources aside from savings accounts, stocks and bonds, and other common assets. These include home equity, annuities, life insurance policies, and health savings accounts (HSAs).

The most important financial asset many older people have is home equity — the value of the home they own after any mortgage amount owed or other liability has been subtracted. The amount of home equity can be substantial, especially if the home was purchased many years before and the mortgage has been mostly or entirely paid off.

In the past, there were only two main ways of turning home equity into funds — selling the home or taking out a home equity loan. Each has serious drawbacks. Selling means leaving a longtime residence, and a home equity loan requires regular payments at a time when a person needs more income, not another expense. Fortunately, there are now several new methods of drawing on home equity. The most popular is the reverse mortgage.

A reverse mortgage is a type of home equity loan available to those 62 and older. We can best understand how it works by comparing it to regular mortgages and conventional home equity loans:

• In a regular mortgage, a bank lends a person money to buy a home, and the person pays the lender back via monthly payments. The home is security for the loan.
• In a conventional home equity loan, a bank lends money to someone who already owns a home outright or has substantial equity, with the home or equity serving as security. The borrower must make regular payments to the lender.
• In a reverse mortgage, a bank lends money to a homeowner with the home serving as security. However, the homeowner does not have to make regular payments to the lender. Instead, the loan must be paid off only when the homeowner dies, sells the home, or moves out of the home.

Thus a reverse mortgage can be advantageous for an elderly person — she can obtain funds from her home equity without having to worry about making loan payments, and without having to leave her home.

Generally, a homeowner must be at least 62 years old and the home must be his principal residence. The lender’s payment to the homeowner can be made in a lump sum, in monthly payments, through a line of credit, or a combination of these. The amount advanced depends on several factors including the value of the home, the homeowner’s age, the interest rate charged, the type of reverse mortgage, and local lending limits established by the FHA.

The lender’s payment to the homeowner is not subject to income tax because it is a loan, not income. Interest on a reverse mortgage is not tax deductible until it is actually paid at the end of the loan period. A homeowner taking out a reverse mortgage retains title to her home and is responsible for maintaining it and paying real estate taxes.

An annuity is a type of investment. The investor (called the annuitant) pays money to an insurance company or financial institution, and in return the insurer makes regular payments to the annuitant over a period of time. Depending on the type of annuity, this period may be for as long as the annuitant lives or for a limited, predetermined time.

The payments from an annuity can be used to pay some of the cost of long-term care services. Alternatively, an annuity can be used in combination with long-term care insurance — the annuity income pays for LTCI premiums, and the policy covers the costs of care.

Payments from non-qualified annuity policies are also partially tax-free, since a portion of each payment represents a return of the original premium. Most people choose an annuity that guarantees that at least the amount of money paid in will be paid out — if the annuitant dies before receiving payments totaling the amount paid, payments will be made to beneficiaries until that amount is reached.

There are also variable annuities, in which the payment amount varies with the performance of the investments the annuity funds are placed in. With such an annuity, there is no guarantee the payment amount will be sufficient to cover long-term care expenses, so it may not be suitable for someone seeking to provide for these costs. Unless a very large amount is invested, annuity payments will cover only a portion of long-term care expenses.

A life insurance policy provides protection against the financial consequences of the death of one or more individuals. A person can obtain money from a life insurance policy in various ways and use that money to pay long-term care expenses. However, this approach has serious disadvantages and should generally be used only as a last resort.

Accelerated death benefits (also known as living benefits) are payments of a portion or all of the death benefit before the death of the insured. Benefit triggers typically include: diagnosis of a terminal illness; diagnosis of a specified critical illness; permanent confinement to a nursing home; the need for extended long-term care because of an inability to perform a specified number of ADLs; and cognitive impairment.

The amount obtainable as an accelerated death benefit varies by policy. Many policies pay up to a certain limit — either a dollar figure or a percentage of the death benefit (usually at least 50 percent). A long-term care accelerated death benefit is often paid in monthly installments equal to a percentage of the death benefit (usually 2–5 percent). Money received as accelerated benefits by terminally or chronically ill individuals is not subject to income taxation.

In a viatical settlement, an insured (the viator) sells his life insurance policy to a viatical company. The viatical company pays the viator a lump sum somewhat less than the policy’s death benefit, becomes the owner and beneficiary of the policy, pays the premiums, and receives the death benefit after the viator dies.

Viatical settlements are generally available only to those with a terminal illness and a very limited life expectancy — typically two to three years or less. Under HIPAA, money received from a viatical settlement is tax-free provided the viator has a life expectancy of two years or less and the viatical company is licensed in the states in which it does business.

In a life settlement, an individual sells her policy to a company for a percentage of the death benefit. Unlike a viatical settlement, there is no requirement that the insured be terminally ill, although applicants are generally over 70. The company becomes the owner, pays the premiums, and receives the death benefit when the individual dies. The amount received is much lower than for a viatical settlement because the insured’s life expectancy is usually much longer.

Unlike viatical payments, proceeds from a life settlement in excess of the total amount paid in premiums may be taxable. And as with a viatical settlement, the insured’s beneficiaries will receive no death benefit.

Permanent life insurance policies (but not term policies) accumulate a cash value that the insured can access in three ways:

• Policy loan — the insured borrows a portion of the cash value. Repayment is not required during the insured’s lifetime; when the insured dies, the loan plus interest is subtracted from the death benefit.
• Policy withdrawal (available in some universal life policies) — the insured simply withdraws money from the cash value. Not a loan, so no repayment or interest. Cash value is reduced by the amount withdrawn.
• Policy surrender — the insured terminates the policy and receives the cash surrender value (cash value minus any surrender charges). Enables the largest possible access to cash value, but the policy and all coverage end.

Health Savings Accounts (HSAs) were created by the Medicare Modernization Act of 2003. An HSA is a tax-advantaged arrangement designed to help people pay for their healthcare, and it can also be used to fund long-term care.

Contributions to an HSA (up to an annual limit) are tax-free. Funds carry over from year to year, investment earnings and gains are tax-free, and withdrawals used to pay healthcare or long-term care expenses not covered by insurance are also tax-free. Thus an HSA enables an individual to pay long-term care costs with tax-free money.

HSA funds can be used tax-free to pay long-term care expenses not covered by insurance or otherwise reimbursed. HSA funds can also be used to pay LTCI premiums, and within certain limits this money is also tax-free. However, given the annual limits on contributions, it will be many years before anyone will have accumulated sufficient HSA funds to cover a substantial amount of long-term care costs. In the meantime, HSAs can be seen as a tax-advantaged source of supplementary funding.