Long-Term Care Insurance vs. Medicaid: Protecting Your Assets

When it comes to paying for long-term care, two of the most common options are private long-term care insurance and Medicaid. While both can help cover the costs of nursing homes, assisted living, and home care, they work in fundamentally different ways and have very different implications for your financial security. Understanding the differences between long-term care insurance and Medicaid is essential for protecting your assets and planning for the future.

How Medicaid Pays for Long-Term Care

Medicaid is the single largest payer for long-term care services in the United States. It is a joint federal-state program that provides health coverage to people with limited income and assets. For long-term care specifically, Medicaid covers nursing home care in all states and also covers home and community-based services in most states through waiver programs.

However, Medicaid is designed as a safety net for people with very limited resources. To qualify for Medicaid long-term care benefits, you must meet both medical and financial eligibility requirements. The medical requirement is that you need a nursing facility level of care. The financial requirements are much more restrictive than most people realize.

Medicaid Spend-Down Rules

To qualify for Medicaid long-term care coverage, your countable assets generally must be at or below approximately $2,000 for an individual. Countable assets include bank accounts, investment accounts, retirement accounts (in many states), real estate other than your primary home, and most other financial resources. Some assets are exempt, including your primary home (up to a state-determined equity limit), one vehicle, personal belongings, and a small amount of life insurance.

For most middle-class Americans, this means spending down the majority of their life savings to pay for care before Medicaid will step in. This process, known as spend-down, can be financially devastating for both the person needing care and their spouse.

The Five-Year Look-Back Period

To prevent people from simply giving away their assets to qualify for Medicaid, federal law requires a five-year look-back period in most states. When you apply for Medicaid long-term care benefits, the state will review all financial transactions from the previous five years (60 months). If you transferred assets for less than fair market value during that period, such as giving money to children or transferring property, Medicaid can impose a penalty period during which you are ineligible for benefits.

The penalty period is calculated by dividing the total amount transferred by the average monthly cost of nursing home care in your state. For example, if you gave away $100,000 and the average monthly nursing home cost in your state is $10,000, you would face a 10-month penalty period. During this time, you must find another way to pay for your care.

Spousal Impoverishment Protections

When one spouse needs nursing home care and applies for Medicaid, federal law provides certain protections for the spouse who remains at home, known as the community spouse. These protections are designed to prevent the community spouse from being left with almost nothing.

Key spousal protections include:

• Community Spouse Resource Allowance (CSRA): The community spouse can keep a portion of the couple's combined countable assets, up to a maximum of approximately $154,140 in 2026. The minimum CSRA is approximately $30,828.
• Minimum Monthly Maintenance Needs Allowance (MMMNA): The community spouse is entitled to a minimum monthly income to cover living expenses, approximately $3,853.50 per month in 2026.
• Home exemption: The couple's primary home is generally exempt from the asset limit if the community spouse continues to live there.

While these protections help, they still leave many community spouses in a significantly reduced financial position compared to what they had before their partner needed care.

Medicaid Estate Recovery

After a Medicaid recipient passes away, federal law requires states to seek recovery of long-term care costs paid by Medicaid from the deceased person's estate. This is known as Medicaid estate recovery. The state can make a claim against the estate for the total amount Medicaid spent on nursing home care and other long-term services. The primary target is often the family home, which may need to be sold to repay Medicaid after both spouses have passed away.

There are some protections. Estate recovery cannot occur while a surviving spouse is alive, and some states have additional exemptions. However, for many families, Medicaid estate recovery means that assets they hoped to leave to their children or grandchildren will instead go toward repaying the state for care costs.

How Long-Term Care Insurance Protects Assets

Private long-term care insurance takes a fundamentally different approach. Instead of requiring you to spend down your assets before providing benefits, LTC insurance pays for care based on the policy you purchased, regardless of your wealth. Your savings, your home, and your investments remain untouched by the insurance company.

The key advantages of using long-term care insurance to protect your assets include:

• No spend-down required: You do not need to deplete your savings to receive benefits. Your assets can continue to grow and support your spouse or heirs.
• More care choices: Medicaid coverage for assisted living and home care varies by state and may be limited. LTC insurance gives you the freedom to choose your care setting and provider.
• No estate recovery: There is no equivalent to Medicaid estate recovery with private insurance. Your estate remains intact for your beneficiaries.
• Spousal protection: Your spouse does not have to worry about reduced assets or meeting community spouse resource limits. The household's finances remain largely unaffected.

The tradeoff is that long-term care insurance requires paying premiums, which can be significant. At age 55, annual premiums average around $950 for men and $1,500 for women for a policy with a total benefit pool of approximately $165,000. Couples purchasing policies together at age 55 can expect combined annual premiums of roughly $2,080. These costs increase substantially the older you are when you buy.

Medicaid Partnership Programs

For people who want the best of both worlds, Medicaid Partnership long-term care insurance programs offer a unique solution. These programs, available in most states, allow you to purchase a specially qualified long-term care insurance policy that provides dollar-for-dollar asset protection if you later need to apply for Medicaid.

Here is how Partnership programs work:

1. You purchase a Partnership-qualified long-term care insurance policy in your state.
2. If you need long-term care, your insurance pays benefits first.
3. If your insurance benefits run out and you still need care, you can apply for Medicaid.
4. When applying for Medicaid, you can protect assets equal to the amount your insurance policy paid out, in addition to the normal Medicaid asset limits.

For example, if your Partnership policy paid $200,000 in benefits before being exhausted, you could keep $200,000 in assets above the normal Medicaid limit when applying for Medicaid. In many states, these protected assets are also exempt from Medicaid estate recovery after death.

When Should You Plan?

The most important takeaway is that planning for long-term care should happen well before you need it. Whether you choose long-term care insurance, plan to rely on Medicaid, or develop a combined strategy, early planning gives you the most options.

If you are considering Medicaid as a strategy, keep in mind that the five-year look-back period means any asset protection planning must be done at least five years before you apply. If you wait until you already need care, it is too late to make most of these moves without triggering penalties.

If you are considering long-term care insurance, the best time to apply is while you are healthy and in your 50s or early 60s. Waiting too long can mean higher premiums, reduced benefits, or outright denial due to health conditions.

Which Option Is Right for You?

The best approach depends on your financial situation, your goals, and your family circumstances. Here is a general framework to help guide your thinking:

• Lower assets (under $100,000): Medicaid may be the most practical option since you would spend down relatively quickly regardless. The premium cost of LTC insurance may not be justified.
• Moderate assets ($100,000 to $2 million): This is the sweet spot where long-term care insurance can provide the most value. Your assets are significant enough to protect but not large enough to comfortably self-insure against years of care costs.
• High assets (over $2 million): You may be able to self-insure by setting aside a dedicated fund for potential long-term care costs. However, even wealthy individuals sometimes purchase LTC insurance to preserve assets and avoid drawing down investments during a market downturn.

Regardless of which path you choose, consulting with both a financial advisor and an elder law attorney can help you navigate the complexities of long-term care planning. For more details on Medicaid requirements, see our guide on Medicaid spend-down rules for long-term care.

One important factor many people overlook is the quality of care available under each option. While Medicaid covers nursing home care, not all facilities accept Medicaid patients, and those that do may have waiting lists. With private long-term care insurance, you generally have a wider selection of facilities and providers, including private-pay rooms, higher-rated assisted living communities, and premium home care agencies. This difference in access can have a real impact on the quality of care you or your loved one receives.

Ultimately, the decision between long-term care insurance and Medicaid is not an either-or choice for many families. Some people use a combination approach, purchasing a more modest long-term care insurance policy that covers the first few years of care while preserving enough assets to maintain their standard of living, and then transitioning to Medicaid if care needs extend beyond what the policy covers. Partnership programs make this combined strategy even more effective by protecting additional assets.