Should You Self-Insure Your Long-Term Care?
People have to be careful of their guesses about how long they will live or the type of care they may need. ILLUSTRATION: ALEX NABAUM
For many people, the question of needing some type of long-term care isn’t if, but when. How to pay for that care is another question altogether.
Someone turning age 65 today has almost a 70% chance of needing some type of long-term-care services and support in his or her lifetime, according to LongTermCare.gov, a website managed by the U.S. Department of Health and Human Services. What’s more, 20% will need it for longer than five years, according to LongTermCare.gov.
There are two basic options for funding that aid: self-insuring, where people pay for the care they need out of their own pocket, and long-term care policies, insurance that can help pay for necessary at-home services or nursing-home care.
Setting money aside to pay out of pocket avoids insurance premiums, which may be a plus if people don’t need a lot of care, or any at all. And even if people need significant long-term care, policies may not provide full coverage due to policy limits and other restrictions. A benefit period may range from two years to the insured’s lifetime, according to the Insurance Information Institute, an industry trade group.
But self-insuring also leaves people open to the possibility that they will need more care than they think—which means dipping into essential funds or those earmarked for inheritance.
“It’s not a perfect science to know whether or not to self-insure,” says Jordan Niefeld, a certified financial planner with Raymond James & Associates in Aventura, Fla. Which route you choose can depend on factors such as your finances, asset mix, policy costs, life expectancy, health history and risk tolerance.
Here are seven questions to consider about self-funding long-term-care needs:
1. Who could be a good candidate for self-insuring?
There is no particular line in the sand in terms of net worth or assets. However, wealthier (or “high net worth”) individuals tend to be better suited, says Jeff Donham, a senior wealth adviser with Colony Group in Richmond, Va. That is because wealthier people are more likely to have sufficient assets to cover their future care needs, which could amount to tens or hundreds of thousands of dollars. Wealthier people without dependents such as a spouse or partner or children may have even more cause to think about self-insuring, Donham says.
2. How long can you wait to make a choice?
Generally, rates for long-term-care insurance are most favorable between ages 55 and 65, according to data from the American Association for Long-Term Care Insurance. After age 70, finding and being approved for a policy can be difficult.
3. How much should you set aside for self-funding?
“People like magic numbers, but there isn’t one, unfortunately,” says David Pierce, assistant professor of insurance at the American College of Financial Services, a professional training organization for financial advisers. The amount needed to cover potential long-term-care costs will be based in part on the cost of care today, inflation, life expectancy based on family history and projected returns.
But in deciding, consider that the national monthly median cost in 2021 for a home health aide was about $5,100 a month, according to Genworth’s Cost of Care Survey. The national monthly median cost for an assisted-living facility was $4,500, and a semiprivate room in a nursing home was about $8,000 a month, the survey found.
With self-funding, obviously all of that expense comes out of the patient’s pocket. How does that compare with the costs for long-term-care policies? According to the most recent annual analysis by the American Association for Long-Term Care Insurance, a 55-year-old male purchasing $165,000 of long-term-care benefits that are available to use immediately could expect to pay $900 a year. Adding an inflation growth option that increases available benefit levels by 3% yearly would cost $2,100 annually. The cost for a 55-year-old female seeking the same level of benefits would be $1,500 and $3,600, respectively, the association said.
4. What’s your asset mix?
Even high-net-worth people may not be in a position to self-insure, Pierce says. There are factors that come into play such as how many children they have and the parent’s desire to leave an inheritance. Another consideration is whether parents are philanthropically inclined and want to know they can leave significant money to a favorite charity. Additionally, it makes a difference whether your assets are liquid or illiquid.
“Your net worth could be $1 million, but your house could be $900,000 of it,” Donham says. Before deciding to self-insure, people need to consider: “Is [selling the house] what you’d want to do in that situation?”
5. Are you making good assumptions?
People have to be careful of their guesses about how long they will live or the type of care they may need. For instance, people shouldn’t necessarily assume they will die young just because a parent did. On the other hand, assuming you won’t develop a long-term disease such as Alzheimer’s, especially if it runs in your family, “could be potentially catastrophic to your long-term savings,” Donham says.
Pierce offers the example of a couple who owned several small corporations. The couple decided to self-insure because they felt they weren’t going to live very long, probably wouldn’t need much care and didn’t want to pay the insurance premiums for long-term care. But they lived into their 80s and 90s, and both needed long-term care. This left their seven children with significantly less money than the couple had intended, and they had to sell three of the companies to pay for the long-term care—causing family friction, Pierce says.
6. Is there a middle-of-the-road option?
By shopping around, people could find a stand-alone long-term-care policy at a reasonable rate or a hybrid policy, which combines life insurance with long-term care. While the latter could be more costly, beneficiaries can receive a larger death benefit if long-term-care services aren’t used.
People might also consider purchasing a smaller long-term-care policy and self-insure a portion of their expected costs, Donham says. “You don’t have to get the Cadillac policy that’s going to cover five years at full cost, because you may not use the coverage at all, and then you’ve lost those premium dollars that you’ve put in to cover that risk.”
7. How important is peace of mind?
Jody R. King, director of wealth planning at Fiduciary Trust in Boston, says clients sometimes choose not to self-insure because they can’t stomach the risk. Even though King runs the numbers to show some clients they are likely to have enough assets to cover the cost of care, emotionally they need to know it is taken care of, King says.
It is a trade-off that often comes down to personal comfort. “Would you be bothered if, at age 72, you were in a nursing home for 20 years and had to shell out upwards of $100,000 a year?” Pierce says. “Even if you could handle it financially, would you prefer that money be reserved for something else?”
By Cheryl Winokur Munk
Cheryl Winokur Munk is a writer in West Orange, N.J. She can be reached at email@example.com.