Overview

Long-term care (LTC) planning is financial planning for help with daily living activities — bathing, dressing, eating, transferring, continence, and toileting — that many people need later in life because of chronic illness or disability. The U.S. Department of Health and Human Services estimates that about 70% of people turning 65 will need some long-term care services during their lives (U.S. Department of Health and Human Services).

Choosing between traditional LTC insurance, self-funding, or a hybrid policy affects your retirement cash flow, estate plans, and the quality of care you can obtain. The remainder of this article gives a practical, step-by-step framework to evaluate each option, real-world considerations from client work, and links to deeper coverage on related topics.

Step-by-step evaluation framework

  1. Clarify the risk you are managing

  • Estimate your personal exposure: likelihood of needing care, expected duration, and preferred setting (home care, assisted living, nursing home). Use local cost data to refine estimates (costs vary widely by state and metro area). See our guide on estimating regional costs for long-term care for methodology and tools (How to Estimate Long-Term Care Costs in Your Area).

  • Consider family support and informal care. Many people rely on unpaid family caregivers; assess whether that support is likely and sustainable.

  1. Inventory your financial resources and liquidity

  • List liquid resources (cash, short-term bonds, taxable accounts), earmarked retirement savings, and assets you want to protect for heirs (home equity, business interests, investments).

  • Self-funding works if your liquid pool can comfortably cover the worst-case scenario without stripping retirement income or forcing a distressed sale of assets.

  1. Model costs and run a simple break-even analysis

  • Create a conservative costing scenario: assume an episode of care lasting 2–5 years (median durations vary by condition). Multiply local monthly rates for the type of care you expect by the duration.

  • Compare that outlay to: cumulative expected premiums for a traditional LTC policy, projected benefits from a hybrid policy, or the effect on your net worth if you self-fund. This illustrates when insurance is value-adding and when self-insuring may make sense.

  1. Test policy features and strings

  • For traditional LTC insurance, examine elimination (waiting) periods, daily benefit limits, benefit period, inflation protection (compound vs. simple), and nonforfeiture options.

  • For hybrid policies, review whether the policy is linked to a life-insurance death benefit, how LTC benefits are accelerated, surrender charges, and how benefits interact with other coverage.

  • Look at exclusions, medical underwriting requirements, and how premium increases are handled.

  1. Examine tax and legal implications

  • Some qualified LTC insurance premiums may be deductible as medical expenses if you itemize, subject to age-based IRS limits and the medical expense floor; confirm current rules with a tax advisor and IRS Publication 502 (IRS). State rules may also differ.

  • Consider whether an irrevocable LTC trust or other estate structures make sense for asset protection and Medicaid planning; these are legal strategies best reviewed with an elder-law attorney.

  1. Make an affordability and flexibility assessment
  • Insurance removes volatility but costs ongoing premium payments. Self-funding preserves liquidity and control but carries the risk of catastrophic loss. Hybrids attempt to blend the two by converting life insurance value into LTC benefits, reducing the risk of losing premiums entirely if you never need LTC.

Comparing the three approaches

Traditional long-term care insurance

  • Pros: Targeted coverage for LTC events, often less costly up front than large single-premium hybrids if purchased earlier in life; policies can be tailored for inflation protection.
  • Cons: Premiums can rise over time for new buyers, policies are medically underwritten, and insurers may change product offerings. Medicare generally does not cover LTC beyond limited skilled nursing stays after hospitalization (Medicare.gov).

Self-funding (self-insuring)

  • Pros: Complete control over funds, no underwriting, no premiums, and the ability to leave unused money to heirs.
  • Cons: Risk of depleting retirement savings, lacks pooled-risk protection, and large, unexpected episodes (e.g., dementia) can quickly exhaust resources.

Hybrid policies (life insurance with LTC rider or annuity with LTC benefits)

  • Pros: Provides guaranteed access to value whether through death benefit or LTC acceleration; typically has predictable, single or limited premium structure; may be attractive for people who dislike “wasting” premiums.
  • Cons: Costlier up front; sometimes more complex contract terms; surrender charges and reduced death benefits can apply.

Related coverage and reading: see our article on hybrid policies for a deeper examination (Long-Term Care Hybrid Policies: What You Need to Know) and a practical look at when LTC insurance makes sense (When Long-Term Care Insurance Makes Sense for Your Plan).

Practical planning steps and sample scenarios

Scenario A — Conservative planner, limited family support

  • Age 62, good health, wants to protect assets for heirs. She is willing to pay steady premiums to avoid the risk that a long LTC episode will deplete assets.

  • Recommendation pattern: Consider a traditional LTC policy with inflation protection purchased while healthy, or a guaranteed hybrid if preserving inheritance is a priority.

Scenario B — High-net-worth, wants flexibility

  • Age 68, large investable assets, prefers to retain control of funds but wants to avoid estate volatility.

  • Recommendation pattern: Self-fund a portion with a liquidity buffer and consider a hybrid product to cap catastrophic exposure while preserving some death benefit for heirs.

Scenario C — Late starter with limited liquidity

  • Age 76, minimal savings, relies mostly on Social Security and a small pension.

  • Recommendation pattern: Traditional LTC insurance may be either unaffordable or unavailable due to underwriting. Focus on Medicaid planning via an elder-law attorney and evaluate community resources and state programs.

Key policy design questions to ask before you buy

  • How long is the elimination period (number of days before benefits start)?
  • What daily or monthly benefit does the policy provide and for how long? Is inflation protection included or optional?
  • Are benefits paid for home health care, adult day care, assisted living, and nursing home care?
  • Can you change coverage later, and what happens if you lapse on premiums?
  • For hybrids: how does accessing the LTC acceleration affect the death benefit?

Common mistakes and how to avoid them

  • Assuming Medicare covers long-term custodial care — it generally does not (Medicare.gov).
  • Waiting too long to buy insurance — premiums rise with age and health underwriting tightens.
  • Confusing cash-value life insurance with a purpose-built hybrid without checking riders and charges.
  • Failing to run a downside affordability stress test that models multi-year care episodes.

Practical tools and resources

  • Local cost estimates: state health department sites and private cost surveys (e.g., Genworth Cost of Care Survey) help localize assumptions.
  • Policy comparison: request the policy summary, outline of coverage, and plan illustrations showing benefit payouts and assumptions.
  • Professional help: work with a fee-only financial planner, an insurance specialist experienced in LTC, and an elder-law attorney for Medicaid or trust planning.

Related reading on this site: Long-Term Care Insurance vs. Self-Insuring: Pros and Cons and When Long-Term Care Insurance Makes Sense for Your Plan.

Final checklist before deciding

  • Have you modeled a 2–5 year care episode with local pricing?
  • Do you understand the policy’s inflation protection and elimination period?
  • Can you afford the premiums long term without impairing retirement cash flow?
  • Have you checked alternatives (hybrids, Medicaid planning, family caregiving) and legal/tax implications?

Professional disclaimer: This article is educational and not personalized financial, tax, or legal advice. Rules change over time; consult a qualified financial planner, tax professional, or elder-law attorney to review your specific situation.

Authoritative sources

  • U.S. Department of Health and Human Services: “What Is Long-Term Care?” and related statistics (hhs.gov)
  • Medicare: coverage rules and limits for skilled nursing and home health care (medicare.gov)
  • National Association of Insurance Commissioners (NAIC): consumer guides for LTC insurance
  • Consumer Financial Protection Bureau: guides on long-term care and paying for care