Long Term Care Insurance: Types, Costs, Tax Rules, and How It Fits Your Retirement Plan

Picture this: It’s 2035, and Margaret, a 68-year-old retiree, suffers a stroke that leaves her needing round-the-clock care. The nursing home her family chooses costs $120,000 per year. Without long term care insurance, Margaret’s retirement savings—carefully accumulated over four decades—begin disappearing at a rate of $10,000 per month.

Long term care insurance is designed precisely for situations like Margaret’s. It covers the cost of assistance with activities of daily living when you can no longer perform them independently—whether that care happens at home, in an assisted living facility, a memory care unit, or a nursing home. Unlike regular health insurance or Medicare, which focus on acute medical treatment, term care insurance pays for the ongoing personal care and supervision that chronic conditions demand.

The numbers are sobering. In 2025, the full cost of nursing facility care ranges from approximately $65,000 to $110,000 or more per year, depending on your state and the level of care required. In high-cost states like California, long term care costs have inflated at 5% or more annually for years. Around 70% of people over age 65 will need some form of long term care during their lifetime.

Key Stat: Roughly 70% of Americans over 65 will require long-term care services at some point in their lives.

At Third Act Retirement Planning, we help sudden-wealth clients—those who’ve received an inheritance, sold a business, negotiated NIL income, or received legal settlements—determine whether long term care insurance belongs in their retirement and legacy plan. This isn’t a one-size-fits-all decision. It requires weighing your financial circumstances, family situation, health status, and the legacy you hope to leave.

What Is Long-Term Care and Who Typically Needs It?

Long-term care refers to non-acute assistance with activities of daily living and cognitive impairment lasting 90 days or more—not the short hospital stays that Medicare covers.

The six core activities of daily living (ADLs) that trigger most benefit triggers are:

• Bathing – Getting in and out of a tub or shower safely

• Dressing – Putting on and removing clothing

• Eating – Feeding oneself (not meal preparation)

• Toileting – Getting to and using the toilet

• Continence – Managing bladder and bowel function

• Transferring – Moving between bed, chair, and standing positions

When someone cannot perform two or more of these ADLs without substantial assistance or hands on assistance, or when they experience severe cognitive impairment such as Alzheimer's disease—a common condition that can trigger long term care insurance benefits—or other forms of dementia, they typically qualify for long term care services.

People need this type of care for many reasons. Stroke, Parkinson’s disease, arthritis, frailty from aging, serious accidents, and age-related cognitive decline are among the most common. These conditions often emerge between ages 75 and 85, though they can strike earlier. A 60-year-old who suffers a traumatic brain injury in a car accident may need decades of care.

Research suggests that roughly 30% of older adults who didn’t plan for care costs later regret assuming they would never need long term care. This planning mistake can devastate retirement savings and burden family members who become unpaid caregivers.

Your odds of needing care depend on several factors: longevity (living longer means more opportunity for health decline), family support (do you have nearby relatives willing and able to provide care?), and personal health history. A family history of mental illness, dementia, or chronic conditions should inform how aggressively you plan. These factors feed directly into a holistic retirement plan that accounts for healthcare contingencies.

Major Types of Long-Term Care Insurance Policies

There is no one-size-fits-all solution when it comes to term care insurance. Policies differ significantly in how they pay benefits, whether they include a death benefit, and how they’re funded. The right choice depends on your personal situation, risk tolerance, and broader financial goals.

At Third Act Retirement Planning, we help clients compare these structures in the context of their retirement income, tax planning, and estate strategy—not as a standalone product decision.

The three primary categories of long-term care insurance are:

• Standalone (Traditional) Long-Term Care Insurance – Dedicated policies that pay only for care

• Long-Term Care Riders on Life Insurance or Annuities – Add-ons that accelerate existing policy benefits for care

• Linked-Benefit (Hybrid) Long-Term Care Insurance – Combination products offering both care coverage and a guaranteed death benefit

Each type has distinct pros, cons, costs, and tax implications that suit different wealth levels and ages.

Standalone (Traditional) Long-Term Care Insurance

Traditional long term care insurance works like other insurance products: you pay premiums, and if you meet the policy’s benefit triggers, the insurance company reimburses approved care costs. These policies activate when a licensed health care practitioner certifies that you cannot perform two or more ADLs for at least 90 days, or that you have severe cognitive impairment requiring substantial supervision.

When designing a traditional policy, you’ll make several key choices:

• Daily benefit or monthly maximum benefit – How much the policy pays per day or month (e.g., $150–$300/day)

• Benefit period – How long benefits last (2, 3, 5 years, or lifetime maximum benefits)

• Elimination period – The waiting period before benefits begin (0, 30, 60, 90, or 180 days during which you pay the full cost)

• Inflation protection – Whether benefits grow over time (3% or 5% compound automatic inflation protection is common)

Consider Catherine, a 60-year-old woman who purchases a policy with a $200 daily benefit, 5-year benefit period, 90-day elimination period, and 3% compound inflation protection. At age 75, she suffers a stroke requiring home care. Her benefits begin paying after the 90-day waiting period, and because of inflation protection, her daily maximum benefit has grown substantially from the original $200.

The critical trade-off with traditional policies: they’re often “use-it-or-lose-it.” If you never need care, there’s no death benefit or return of premium—the money is simply gone. For clients with significant assets, this can feel like an uncomfortable bet.

Traditional policies suit clients who:

• Want maximum coverage per premium dollar

• Are comfortable with premiums that might increase (subject to state insurance commissioners approval)

• Are purchasing in their mid-50s to early 60s when underwriting is more favorable

• Prioritize pure long-term care leverage over death benefit guarantees

Medical underwriting matters significantly. Buying coverage before age 65 typically means lower annual premiums and better odds of approval. Waiting until your late 60s or 70s risks higher premiums or outright denial based on health conditions.

Long-Term Care Insurance Riders on Life Insurance or Annuities

An LTC rider attaches to an existing or new permanent life insurance policy or annuity, allowing you to accelerate part of the life insurance death benefit or account value to pay for long term care expenses while you’re still alive.

The benefit triggers mirror traditional policies: inability to perform two or more ADLs for at least 90 days, or severe cognitive impairment, with care prescribed by a licensed health care practitioner in a documented plan. Once activated, the rider typically pays a percentage of the death benefit each month—often 2% to 4% of the face amount—until exhausted.

Consider Frank, an 82-year-old man with a $500,000 life insurance policy that includes an LTC rider. When he develops dementia requiring memory care, the rider allows him to draw up to $250,000 for care costs. The remaining $250,000 passes to his heirs as a death benefit when he passes.

The key advantage: if you never need long term care, your beneficiaries receive the full death benefit as usual. This appeals strongly to clients focused on legacy planning and biblical stewardship—nothing is “wasted.”

Riders work well for clients who:

• Already need life insurance for estate liquidity or wealth transfer

• Want to avoid the “use-it-or-lose-it” concern of traditional policies

• Prefer level premiums built into a long-term estate and charitable giving strategy

• Are willing to pay higher premiums than base life insurance alone

The trade-off is reduced flexibility compared to standalone policies, and using benefits for care reduces what heirs receive.

Linked-Benefit (Hybrid) Long-Term Care Insurance

Linked-benefit or hybrid insurance policies combine a guaranteed pool of long term care benefits with permanent life insurance or an annuity. Unlike traditional policies with ongoing premiums, hybrids are typically funded with a lump sum payment (e.g., $100,000 or more) or limited payments over a set period (e.g., 10 years).

These policies provide multiple guarantees:

• Specified LTC benefit pool – Often 2–3 times the premium paid, available for care costs

• Minimum death benefit – Even if you exhaust care benefits, a percentage (often 10%) remains for heirs

• Guaranteed premiums – Once funded, no future premium increases

• Optional features – Cash indemnity payments (fixed amounts regardless of expenses), joint pooled benefits for couples, or cash value accumulation

Consider Gabby, a 56-year-old who purchases a hybrid policy with a $150,000 death benefit. She gains access to $450,000 in potential long term care funds. If she never needs care, her heirs receive the full death benefit. If she uses $300,000 for care, the remaining $150,000 still passes to beneficiaries.

Hybrid policies are particularly attractive for sudden-wealth clients—those who’ve received an inheritance, sold a business, or received a legal settlement—who want to reposition a portion of low-yield cash or CDs into an asset that covers both long term care and legacy goals tax-efficiently.

The trade-offs are significant:

• Larger upfront funding requirement – Most require $75,000–$200,000+ per person

• Less flexibility once committed – Withdrawing funds often reduces benefits

• Complexity – These products require careful fiduciary analysis rather than reliance on insurance agents using high pressure tactics

Key Policy Features: How Benefits, Costs, and Protections Work

Beyond policy type, the fine print—benefit triggers, elimination periods, daily maximums, and inflation protection—drives how well a policy actually performs when you need it.

Many long term care insurance policies are federally tax qualified policies under IRS Section 7702B. This means benefits are generally tax-free when used for qualified long term care services, and premiums may be treated as medical expenses subject to age-based IRS limits.

The core components to understand include:

• Benefit triggers – The conditions that must be met before the policy will pay benefits (typically 2+ ADLs or cognitive impairment certified by a licensed health care practitioner)

• Elimination period – The waiting period (30, 60, 90, or 180 days) during which you pay costs before benefits begin paying

• Daily benefit or monthly maximum – The maximum amount the policy pays per day or month

• Lifetime maximum or benefit period – The total pool of money or length of time the policy will provide benefits

• Payment method – Reimbursement (pays actual expenses up to the maximum) vs. cash indemnity (pays a set amount regardless of actual costs)

Federally tax qualified policies include important consumer protections: they must be guaranteed renewable (the insurance company cannot cancel except for nonpayment or fraud), and state regulators must approve any requests to increase premiums across a class of policyholders.

Eligibility and Underwriting: Qualifying for Long-Term Care Insurance

Qualifying for long-term care insurance starts with a process known as medical underwriting. This is where the insurance company evaluates your health status and medical history to determine your eligibility and the cost of your coverage. You’ll typically be asked to complete a detailed health questionnaire, provide access to your medical records, and sometimes undergo a brief medical exam. The goal is to assess your risk of needing long term care in the future.

Several factors can influence whether you’re approved for term care insurance and what your premiums will be. Age is a major consideration—the younger and healthier you are when you apply, the more likely you are to qualify and lock in lower rates. Your current health status, including any chronic conditions or history of mental illness, will also play a significant role. Applicants with a history of severe cognitive impairment, such as Alzheimer’s disease, or those who already require substantial supervision for daily living, may face higher premiums or may not qualify for coverage at all.

Family medical history and lifestyle habits, such as smoking or high-risk activities, can also impact your eligibility. Because each insurance company has its own underwriting guidelines, working with a knowledgeable insurance agent can help you navigate the process and find a policy that fits your needs. Remember, the earlier you start the application process—ideally before any major health changes—the better your chances of securing affordable long term care coverage.

Claims and Benefits Payment: Accessing Your Coverage When You Need It

When the time comes to use your long-term care insurance, understanding how to access your benefits is crucial. The process begins by notifying your insurance company that you require care. You’ll need documentation from a licensed health care practitioner, such as a doctor or nurse, confirming that you meet the policy’s benefit triggers—typically the inability to perform at least two activities of daily living or the presence of a severe cognitive impairment.

Once your claim is submitted, the insurance company will review your case and, if approved, your benefits begin after you satisfy the elimination period (also known as the waiting period). This is the initial stretch—often 30, 60, or 90 days—during which you are responsible for the full cost of care before the policy starts to pay benefits. After the waiting period, the policy will pay up to the daily maximum benefit specified in your contract, whether you receive care at home, in a nursing home, assisted living facility, or adult day care center.

It’s important to review your policy’s inflation protection features, as these can increase your daily maximum benefit over time to help keep pace with rising long term care expenses. Be mindful of your policy’s lifetime maximum benefits, which cap the total amount the insurance company will pay over the life of the policy. Understanding these details ensures you can make the most of your coverage and plan effectively for your long term care needs.

Consumer Protections and Rights for Long-Term Care Policyholders

As a policyholder, you’re entitled to a range of consumer protections designed to safeguard your interests throughout the life of your long-term care insurance policy. One of the most important is the guaranteed renewable provision, which means your coverage cannot be canceled by the insurance company due to changes in your health or age—as long as you continue to pay your premiums on time.

If you have a federally tax qualified policy, you may benefit from additional advantages, such as the ability to deduct premiums as medical expenses and receive tax-free benefits. These policies must also provide clear, transparent disclosures about what is covered, any limitations, and how benefits are paid, so you can make informed decisions about your care insurance.

Oversight from the National Association of Insurance Commissioners (NAIC) and state insurance commissioners helps ensure that insurance companies treat policyholders fairly and comply with consumer protection laws. If you ever have trouble paying your premiums or need help with a claim, many insurers offer support services and flexible options to help you maintain your coverage.

Regularly reviewing your policy with a financial advisor can help ensure it continues to meet your needs and financial circumstances, especially as your health status or personal situation changes. Staying informed about your rights and the consumer protections in place can give you confidence and peace of mind as you plan for your long term care.

Tax-Qualified vs Non-Tax-Qualified Long-Term Care Policies

Understanding the tax treatment of long term care insurance can mean thousands of dollars in savings—or unexpected tax bills. Tax qualified policy options follow stricter federal standards but offer meaningful tax advantages.

A federally tax qualified policy adheres to HIPAA and IRS Section 7702B standards. To trigger benefits, you must be certified as chronically ill by a licensed health care practitioner, meaning you cannot perform at least two ADLs for at least 90 days or require substantial supervision due to severe cognitive impairment. Care must be provided under a plan of care prescribed by a practitioner.

The tax benefits of qualified policies include:

For 2025, a 60-year-old can deduct up to approximately $1,800 in qualified long term care insurance premiums as medical expenses; a 70-year-old can deduct approximately $4,500. These deductions only provide value if your total medical expenses exceed 7.5% of adjusted gross income and you itemize deductions.

A non tax qualified policy may offer more flexible triggers—for example, including ambulation as an ADL or shorter certification periods—but benefits may be partially taxable. The tax treatment requires individualized CPA advice.

State tax treatment varies significantly:

• Some states offer additional deductions or credits for long term care insurance premiums

• Partnership programs in many states offer Medicaid asset protection for policyholders

• Rules change frequently; California, Massachusetts, and others have specific provisions

At Third Act Retirement Planning, we coordinate LTC decisions with your broader tax planning, charitable giving, and estate strategies to avoid unintended surprises. The interaction between supplemental security income, Medicaid eligibility, and care insurance benefits requires careful analysis.

Costs of Long-Term Care Insurance and What Drives Your Premium

What does long term care insurance actually cost? The answer depends on numerous factors, but here’s a concrete example: A healthy 55-year-old couple purchasing traditional policies in 2025 with a 3-year benefit period, $150 daily benefit, 90-day elimination period, and 3% compound inflation protection might see combined annual premiums in the $4,000–$7,000 range, depending on their state, insurer, and health classification.

The main factors driving your premium include:

Traditional policy premiums are not guaranteed level. While insurance companies cannot raise your individual premium, they can seek regulatory approval to increase premiums for an entire class of policyholders. History shows that many policies issued before 2010 experienced significant rate hikes, sometimes doubling premiums over a decade.

Many hybrid insurance policies, by contrast, offer contractually guaranteed premiums once funded—but require significant upfront capital from savings or a windfall.

When evaluating affordability, consider this scenario: If you purchase coverage at age 58, you may pay premiums for 30+ years. Can you continue to pay premiums if:

• Your spouse dies and household income drops?

• You face a market downturn that reduces your portfolio 30%?

• You retire earlier than planned?

If premiums become unaffordable, you may face trouble paying and risk losing coverage entirely, or receiving reduced paid-up benefits. A fee-only financial advisor stress-tests affordability using actual retirement projections—not optimistic assumptions.

Who Should Consider Long-Term Care Insurance—and Who Might Not Need It?

Long term care insurance is most appropriate for people with meaningful assets—typically $500,000 to $5 million or more in net worth—who want to protect savings, maintain independence in choosing their care setting, and avoid overburdening family members or relying on Medicaid.

Profiles who should strongly consider coverage:

• Married couples in their 50s–60s with retirement assets to protect

• Single retirees without nearby family caregivers able to provide substantial assistance

• Sudden-wealth individuals who want to safeguard a new inheritance, settlement, or business sale proceeds

• Those with family history of Alzheimer’s disease, stroke, or other conditions requiring long-term care

• Individuals who value choice in care setting (home vs. facility care) and quality of care

Scenarios where coverage may not be suitable:

• Very low assets likely to qualify for Medicaid quickly (under $100,000 excluding home equity)

• Ultra-high-net-worth families (e.g., $10M+) who can comfortably self-insure and prefer other planning strategies

• Those with significant health conditions that would result in denial or prohibitively higher premiums

• Individuals already receiving Medicaid or supplemental security income

Faith and values-based considerations:

Biblical wisdom emphasizes stewardship of resources, providing for family (1 Timothy 5:8), and caring for the vulnerable. For many clients, purchasing insurance represents responsible planning—protecting a spouse from becoming an unpaid caregiver, preserving assets for children’s inheritance, and maintaining the ability to give generously to charitable causes even if long-term care needs arise.

The decision involves more than math. Consider:

• Are adult children willing and geographically able to provide personal care?

• How important is preserving assets for legacy and charitable giving?

• What are your personal needs and preferences about care settings?

When Is the Best Time to Buy Long-Term Care Insurance?

Waiting until you “feel old” to explore coverage often means higher premiums, stricter medical underwriting, or outright denial due to health changes. Insurance companies evaluate your health status carefully, and conditions like diabetes, heart disease, or early cognitive symptoms can make purchasing insurance difficult or impossible.

Age-based guidance:

Coordinate timing with major life events:

• Business sale – Liquidity to fund a hybrid policy with a lump sum

• Large inheritance – Reposition assets into coverage that protects the windfall

• Retirement date – Lock in coverage while still healthy and working

• Legal settlement – Protect the proceeds that may need to last decades

We recommend discussing expected future health needs with your primary care doctor and considering family history (dementia, stroke, Parkinson’s) when determining how much coverage to pursue and how quickly.

At Third Act Retirement Planning, we model “what if I wait five years?” scenarios. These projections show:

• How premiums increase with age

• The potential investment growth of premiums paid earlier vs. later

• The risk of becoming uninsurable due to health changes

For sudden-wealth clients, the question isn’t just “can I afford it?” but “what’s the cost of waiting?”

How Long-Term Care Insurance Fits Into a Holistic Retirement, Tax, and Legacy Plan

Long-term care insurance is one tool among many in a comprehensive retirement plan. Others include personal savings, Social Security optimization, Medicare coverage, long-term care riders on existing policies, Medicaid planning for those with limited resources, and informal care from family members.

A well-designed plan integrates long term care decisions with:

• Retirement income planning – Ensuring premiums don’t jeopardize cash flow during market downturns or longevity risk

• Investment strategy – Reserving a portion of assets specifically for care risk, whether through insurance or self-insurance

• Estate planning – Protecting inheritances and charitable bequests from being consumed by care costs

• Tax planning – Maximizing deductibility of premiums and understanding how benefits interact with adjusted gross income

• Spousal protection – Ensuring one spouse’s care needs don’t impoverish the surviving spouse

Consulting a financial planner can help you assess your long-term care insurance needs and ensure your choices align with your overall financial plan and asset protection strategies.

As a fee-only fiduciary at Third Act Retirement Planning, we evaluate trade-offs between self-insuring, traditional policies, and hybrid solutions based on your risk tolerance and biblical stewardship values—not based on which product pays us the highest commission.

We also encourage including LTC discussions in your will and trust reviews, powers of attorney, and healthcare directives. Your decision-makers should understand:

• Whether you have long-term care coverage

• When and how to file claims

• Your preferences for care settings (home care vs. adult day care center vs. nursing facility)

• How to coordinate benefits with other assets

Group policies from former employers or sponsoring group organizations should be reviewed alongside individual insurance options to ensure you’re maximizing available coverage.

How Third Act Retirement Planning Helps You Decide Your Next Step

Deciding whether to purchase term care insurance—and which type—requires more than reading articles. It requires personalized analysis that considers your complete financial picture.

Our process includes:

1. Discovery call – We learn about your situation, concerns, and goals

2. Data gathering – Assets, income, health history, family situation, existing group coverage or individual insurance policies

3. LTC cost modeling – State- and region-specific projections for nursing home, assisted living, and home care costs

4. Policy comparison – Analysis of traditional, rider, and hybrid options including how much coverage makes sense

5. Written recommendations – Clear guidance integrated with your retirement income, tax, estate, and charitable giving plan

We are fee-only and do not accept commissions from insurance companies or referral fees from insurance agents. Our guidance on whether to buy coverage—and which type—is aligned entirely with your best interest, not sales incentives.

We serve clients in and beyond Marietta, Georgia, particularly those experiencing sudden wealth who want purpose-driven stewardship rather than high pressure tactics. Our approach integrates biblical wisdom with modern financial planning.

What to bring to a review:

• Existing policies (individual, group, partnership programs)

• Rate increase notices you’ve received

• Questions about whether to keep, adjust, or consider alternatives

• Your current estate documents for coordination

Protecting your “third act” means planning today for personal needs that may arise decades from now. Long term care insurance isn’t right for everyone—but understanding your options is essential for anyone who wants to preserve independence, protect loved ones, and leave a meaningful legacy.

Ready to explore whether long-term care insurance belongs in your retirement plan? Schedule a retirement and long-term care planning consultation with Third Act Retirement Planning. We’ll help you make an informed decision—one that honors your values, protects your family, and positions your wealth for lasting purpose.