Frequently clients will ask us how much they need to have in savings in order to “self-insure” or “self-fund” their long-term care expenses—meaning that they would just pay for any care privately out of pocket instead of purchasing some form of long-term care insurance.

Here’s the potential problem with this thought process:

  • Long-term care costs can vary significantly from one household to the next.
  • Relying on “averages” can be incredibly misleading. Some studies report that the “average” length of care is 2.5-3 years. However, these studies usually only look at institutional care or paid care and overlook the fact that family members often provide free care before paid care is sought.
  • The average person with Alzheimer’s disease needs caregiving assistance for 8 years.
  • 20% of individuals age 65 or older are expected to need long-term care for 5 years or longer.

Long-Term Care Planning Is About Leveraging Your Assets and Mitigating Risk

If I told you that there was a 50/50 likelihood of your house burning down, would you purchase homeowners insurance? Of course! In fact, the odds are quite lower than that, and yet most of us still buy homeowners insurance to protect our homes. Yet, the potential likelihood of needing long-term care is significantly higher and the costs are arguably comparable to or exceed having your house burn down—yet we see the individuals that want to “self-insure” for long-term care. Why take such a risk?

The common argument that people make in favor of self-insuring is that long-term care insurance is “too expensive,” but usually, when we dig a bit deeper, we find that the only tool they are familiar with is traditional long-term care insurance. We’ve previously written about traditional long-term care insurance and some of the common frustrations—including the “use it or lose it” nature of traditional long-term care insurance.

However, today’s asset-based long-term care options, such as life insurance with a long-term care rider or annuities with long-term care riders, give individuals a powerful opportunity to leverage their assets to mitigate their risk.

Think about it. You place a portion of your savings into an asset-based long-term care product that has cash value. If you end up not needing care or only a little bit of care, then cash value is still part of your estate. The only thing you’ve potentially lost is maybe a lower rate of return on the money. I say maybe because the interest rates on these products are usually guaranteed, but your investment portfolio typically is not guaranteed and could go down in value.

However, if you do need long-term care, these products generally provide long-term care coverage that is 2-3 times (or more) the funds that you originally invested in the product, thereby significantly mitigating your risk. Further, if you know that you have long-term care coverage in place, that may free you to be a little more aggressive with the investment portfolio, so depending on the market, you could potentially end up with better overall portfolio performance in the long run.

Disclaimer: This website and the information provided on this website is for general information purposes and should not be construed as specific legal, tax, accounting, or financial advice. Although efforts are made to keep information accurate and up to date, occasionally unintended errors and misprints may occur. We assume no responsibility or liability for any errors or omissions of the content of this site. It is important to do your own analysis before making any legal or investment decisions about your own personal circumstances. The ideas and strategies discussed herein should never be used without first assessing your own personal and financial situation and consulting with a legal or financial professional.

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning