Photo of two women talking about long-term care.

Start planning now: 4 options to pay for nursing-home costs

As you get older, are you ready for the possibility that you’ll need to pay for long-term care? Whether it’s a skilled nursing facility, assisted-living, or in-home help, the price tags can be high.

Consider these figures, on average:


Cost of an assisted-living facility:
$51,000/year1

Semi-private room in a nursing home:
$93,000/year1


While you may be saving steadily for retirement, now is the time to make sure you’re also prepared for these potential expenses. “The sooner you start planning for long-term care, generally speaking, the more choices you’ll have,” says Tyler De Haan, director of business development in retirement solutions at Principal®. “And having a plan in place may reduce any stress that a long-term care event might put on family members and loved ones.”

So, what are your options?

1. Medicaid coverage of nursing home costs and long-term care

Medicaid is a federal program, administered by each state, that helps pay medical expenses and long-term care costs for people with low income and few assets.2 While Medicaid may pay for nursing home costs, there are strict financial rules for your Medicaid coverage to kick in. That often means spending down all your assets first. Think of it like hitting an insurance premium—but the premium may be your life savings and all you own.

“If your financial goal when you pass away is to have your last check bounce, then there’s really no need to buy long-term care insurance,” De Haan says. Medicaid would suffice. “However, if your financial goals include leaving a legacy to your family or a charity, that’s when you need to start considering other long-term care options.”

One of our top retirement professionals looks at how to cover the high costs of long-term care.

“We have a tendency to think that the way the world is now is the way it’s always going to be. If you’re healthy and have clear cognitive abilities, it’s hard to imagine not being able to remember somebody’s name, or not being able to mow the lawn, or not being able to get yourself dressed. Even as we get older and see others go through it. This bias sometimes inhibits our ability to plan for these long-term risks.”

Tyler De Haan, director of business development in retirement solutions

2. Traditional long-term care insurance

This is an insurance policy that helps pay some of the expenses associated with nursing homes and long-term care that aren’t covered by health insurance. Like other insurance policies, you’ll select the amount of coverage you want and pay premiums. When you need coverage, there’s typically a period of a few months before the insurance company will begin reimbursing you for expenses.

“There’s some certainty around these types of policies. You know what you’re getting and what your cost of living would be each year,” De Haan says.

But you can’t wait until you need care to get coverage. These policies tend to become costly as you get older, so buying early is ideal, if that’s an option for you.

3. Other insurance and guaranteed options

There are other types of insurance and guaranteed income options, as well. Some life insurance policies may allow you to borrow against the policy or withdraw benefits early in certain cases to help pay for long-term care expenses.

Income annuities are another option. You pay a lump sum up front to an insurance company, and in return, it pays you a guaranteed annual income. Besides providing regular income in retirement, some annuities have special contract terms designed specifically to help cover the costs of long-term care.

The plus side of these hybrid options, according to De Haan: If you don’t require long-term care, you aren’t out any money; your beneficiaries get what remains. On the other hand, if you’re in a nursing home for an extended period, you may fall short on coverage.

4. Self-funding nursing home expenses

Self-funding is exactly what it sounds like. This approach requires a lot of time, a lot of assets, or both. And there’s a risk of exhausting your retirement savings. But if you can afford it, it’s not a bad option.

It might mean tapping into your savings, investment, or retirement accounts for long-term care expenses. For instance, you could use a Roth IRA (individual retirement account). These retirement accounts allow you to put in after-tax money and make qualified withdrawals tax free later in life. Unlike a 401(k) or traditional IRA, you’re not required to withdraw a minimum amount of money at any specific age, so you could leave the funds in the account until you potentially need them to cover these costs.

Ready to get started?

  • A holistic plan to pay for long-term care may include several of the options mentioned above. A financial professional can help weigh your options and find a solution that fits together with your other retirement and long-term financial goals. If you’d like to meet with one face-to-face, we’ll help you find one.
  • Looking for estimates? Start visualizing retirement with your own info by visiting our planning tools and calculators.

1 2020 Cost of Care Survey.

2 Medicaid covers shared rooms in nursing homes for qualifying beneficiaries with few assets and little income. According to the American Council on Aging, ballpark limits are assets valued under $2,000 and monthly income under $2,383. Eligibility is state specific. Principal doesn’t offer long-term care insurance.

Principal doesn’t offer long-term care insurance.

Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. and the companies available through the Preferred Product Network, Inc. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 888-774-6267, member SIPC and/or independent broker/dealers. Principal National, Principal Life, Preferred Product Network, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.