How to Pay for Long-Term Care: Your Options, the Real Costs, and What Most Families Miss

Nobody wants to think about needing long-term care. But the numbers don’t lie: roughly 70% of Americans turning 65 today will need some form of long-term care before they die.

And here’s the part that catches most families off guard: Medicare does not pay for long-term care.

Not the nursing home. Not the assisted living facility. Not the home health aide who helps you get dressed every morning. Medicare covers short-term skilled nursing after a hospital stay, but that runs out after 100 days, and most people exhaust their coverage far sooner.

So the question becomes: How do you actually pay for it?

There are really only four options. Each one has trade-offs. Let me walk through them honestly so you can make a decision that actually fits your situation.

The Real Cost of Long-Term Care in 2026

Before we talk about how to pay, let’s talk about what you’re paying for. These are 2026 national median costs according to Genworth’s Cost of Care Survey:

• Home health aide: $75,504 per year ($6,292/month)
• Assisted living facility: $64,200 per year ($5,350/month)
• Semi-private nursing home room: $104,025 per year ($8,669/month)
• Private nursing home room: $116,800 per year ($9,733/month)

In Alabama, costs tend to run slightly below the national median, but they’re still substantial. A semi-private nursing home room in Alabama averages around $7,300 per month.

The average length of a long-term care need? About 3 years for women and 2.2 years for men. Do the math on that. You’re looking at $200,000 to $350,000 in total costs for many families.

That’s not a medical bill. That’s a second mortgage. And it’s the number-one reason retirees go broke.

Option 1: Self-Pay (Using Your Own Savings)

This is the default plan for most people, even though they don’t realize it. If you haven’t bought long-term care insurance or set up another strategy, your retirement savings become your long-term care plan.

How it works

You pay out of pocket from savings, investments, retirement accounts, or by selling assets like your home.

The pros

• No premiums to pay
• No insurance company to deal with
• Full control over your care choices

The cons

• Depletes retirement savings rapidly
• Withdrawals from IRAs and 401(k)s are taxable income
• Large withdrawals can trigger IRMAA surcharges on your Medicare premiums
• Can leave a surviving spouse financially vulnerable
• May force the sale of your home

The IRMAA trap most families miss

Here’s something almost nobody talks about. When you pull large amounts from retirement accounts to pay for care, that income shows up on your tax return. If your Modified Adjusted Gross Income crosses certain thresholds, you’ll pay IRMAA surcharges, which are extra charges on top of your Medicare Part B and Part D premiums.

In 2026, a married couple filing jointly with income above $218,000 pays an extra $974 per person per year in Part B premiums alone. Cross the $750,000 threshold and you’re paying an extra $5,844 per person. That’s on top of the care costs you’re already hemorrhaging money on.

Use our Medicare Calculators to see exactly where your income falls.

Option 2: Medicaid (The Government Safety Net)

Medicaid is the government program that does pay for long-term care, but there’s a catch: you have to be nearly broke to qualify.

How it works

Medicaid is a means-tested program. In Alabama, to qualify for Medicaid long-term care coverage, you generally must have:

• Countable assets below $2,000 (individual) or limited assets for couples
• Monthly income below certain thresholds (varies by state and program)

Your home may be exempt while you or your spouse lives in it, but Medicaid can place a lien on it and recover costs from your estate after you pass.

The pros

• Covers nursing home care once you qualify
• No premiums

The cons

• You must “spend down” almost all your assets to qualify
• Limited choice of facilities. Not all accept Medicaid
• Can’t leave meaningful assets to your family
• Medicaid estate recovery can claim your home after death
• Medicaid planning strategies require an elder law attorney and careful timing

Medicaid is a safety net, not a strategy. If you have assets you want to protect or a spouse who needs financial security, relying on Medicaid means giving up most of what you’ve built.

For more on how Medicaid and long-term care interact, read our guide: Medicaid and Long-Term Care: What Alabama Families Need to Know.

Option 3: Traditional Long-Term Care Insurance

This was the go-to solution for decades. You buy a policy, pay premiums, and if you need long-term care, the policy pays a daily or monthly benefit.

How it works

Traditional LTC policies typically pay a set daily amount (like $150-$300/day) for a set period (usually 2-5 years) after you meet the benefit trigger, which is typically needing help with 2 or more Activities of Daily Living (bathing, dressing, eating, toileting, transferring, continence).

The pros

• Dedicated coverage for long-term care
• Protects your retirement savings
• Premiums may be tax-deductible (age-based limits apply)
• Gives you more choice of care settings

The cons

• Premiums can increase significantly over time. Many policyholders have seen 40-100% rate increases
• “Use it or lose it.” If you never need care, you get nothing back
• Fewer insurers offer these policies today
• Difficult and expensive to buy after age 65
• Health underwriting may disqualify you

Traditional LTC insurance has become increasingly problematic. Insurance companies badly underpriced these policies in the 1990s and 2000s, and policyholders have been absorbing massive rate increases ever since. Many major carriers have exited the market entirely.

If you already have a policy, do not drop it without talking to us first. You may have valuable benefits that would be impossible to replace. But if you’re shopping for new coverage, there’s a better option to consider.

Option 4: Long-Term Care Annuity (The Hybrid Approach)

This is the option most families have never heard of, and in my experience, it’s the smartest solution for people who have some savings set aside but don’t want to gamble on whether they’ll need care.

How it works

You deposit a lump sum (or make payments over a few years) into a specially designed annuity that has long-term care benefits built in. If you need care, the annuity pays out a multiple of your deposit, often 2x or 3x your original amount, as a long-term care benefit. If you never need care, your money is still there as an annuity or passes to your beneficiaries.

The pros

• No “use it or lose it.” Your money is never wasted
• Leverage. A $100,000 deposit might provide $200,000-$300,000 in long-term care benefits
• Tax-free long-term care benefits under IRC Section 7702B
• No rate increases. Your cost is locked in at the time of deposit
• Death benefit. If you never use the care benefits, your beneficiaries receive the remaining value
• No IRMAA impact. Long-term care benefits from a qualified annuity are not counted as income for IRMAA purposes
• Simpler underwriting than traditional LTC insurance

The cons

• Requires a lump sum or substantial initial deposit (typically $50,000-$250,000)
• Your money is committed to the annuity (though most have liquidity features)
• Not all annuities are created equal. You need to work with an advisor who understands the product

Side-by-Side: Self-Pay vs. LTC Annuity

Let’s look at a real-world comparison for a 65-year-old couple in Alabama with $150,000 in savings they’ve earmarked for potential care needs.

Factor	Self-Pay	LTC Annuity
Total care dollars available	$150,000	$300,000-$450,000
Tax impact of withdrawals	Taxable (if from IRA/401k)	Tax-free LTC benefits
IRMAA risk	High, large withdrawals trigger surcharges	None, LTC benefits don’t count as income
If care is never needed	Money available but was idle	Death benefit passes to heirs
Months of nursing home coverage	~17 months	~35-52 months
Surviving spouse protection	Savings depleted	Remaining benefit available

The math is straightforward. With a long-term care annuity, you’re getting 2-3x the coverage, with no tax consequences, no IRMAA impact, and a death benefit if you never use it.

What Most Families Get Wrong

After helping hundreds of Alabama families plan for retirement, I see the same mistakes over and over:

• “Medicare will cover it.” It won’t. Medicare covers skilled nursing for a limited time after a hospital stay. It does not cover custodial care, which is what most people actually need.
• “I’ll just stay home.” Home care costs nearly as much as assisted living, and someone has to provide it. Family caregivers often burn out, sacrifice their own careers, and damage their health.
• “I’ll worry about it later.” Long-term care products have health underwriting. If you wait until you have health problems, you may not qualify. The best time to plan is when you’re healthy, ideally in your 50s or 60s.
• “We have enough saved.” A three-year nursing home stay at $8,000/month is nearly $300,000. Add in the tax impact and IRMAA surcharges from draining your retirement accounts, and the true cost is even higher.

The Bottom Line

There are really only four ways to pay for long-term care: your own savings, Medicaid (after you’re broke), traditional LTC insurance (if you can find and afford it), or a long-term care annuity.

For most families I work with, a long-term care annuity strikes the right balance. It leverages your money, eliminates the tax and IRMAA traps, and ensures your assets aren’t wasted if you never need care.

But every family’s situation is different. The right answer depends on your health, your assets, your family situation, and what you’re trying to protect.

If you want to talk through your options, I’m happy to sit down with you. No pressure, no sales pitch. I’ll show you what the numbers look like for your specific situation and help you make a decision that actually makes sense.

Frequently Asked Questions

Does Medicare pay for long-term care?

No. Medicare covers short-term skilled nursing care (up to 100 days) after a qualifying hospital stay, but it does not cover custodial or long-term care in a nursing home or assisted living facility.

What is a long-term care annuity?

A long-term care annuity is a hybrid financial product that combines an annuity with long-term care benefits. You make a deposit, and if you need care, the annuity pays out a multiple of your deposit (often 2-3x) as tax-free long-term care benefits. If you never need care, the remaining value passes to your beneficiaries.

How much does long-term care cost in Alabama?

In Alabama, a semi-private nursing home room averages about $7,300 per month. Assisted living averages around $4,000-$5,000 per month. Home health aides average about $4,500-$5,500 per month for full-time care.

Can withdrawing from my IRA to pay for care affect my Medicare premiums?

Yes. Large withdrawals from IRAs and 401(k)s increase your taxable income, which can trigger IRMAA surcharges on your Medicare Part B and Part D premiums. This hidden cost adds thousands of dollars per year on top of your care expenses.

What is the best age to buy long-term care coverage?

The ideal time to explore long-term care coverage is in your late 50s to mid-60s, while you’re still healthy enough to qualify. Premiums and deposit requirements are lower when you’re younger and healthier.

Important Disclaimers

Dalton Insurance Agency is a licensed independent insurance agency. This article is for educational purposes and does not constitute tax or legal advice. Consult with a qualified tax advisor regarding the specific tax treatment of annuity distributions and long-term care expenses in your situation.

We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.