Long-Term Care Insurance vs. Self-Funding: The Options Are Clear - Which Is Right for You?
When it comes to insurance, many people are hesitant to purchase it. They may think they don't need it, already have it, or are unsure what it costs. However, some types of insurance, such as Long-Term Care Insurance, are essential.
Long-Term Care Insurance is designed to help pay for the cost of care if you cannot perform activities of daily living (ADLs) or suffer from a cognitive disorder. ADLs include things like bathing, dressing, eating, and using the toilet. Cognitive disorders include Alzheimer's disease and dementia.
The cost of long-term care can be staggering. Home care is not inexpensive, and most care starts at home. However, assisted living and memory care are often care options people choose or require and are expensive. Nursing homes are the most costly, and the average cost of a private room in a nursing home is over $100,000 per year. And the cost of care can only go up as the population ages and the demand for long-term care increases.
In 25 years, just three years of care could run over $500,000 or more on the average side. If you linger longer, or have Alzheimer’s, it could run over $1,000,000.
How to Pay for Long-Term Care
There are two main options for paying for long-term care unless you have little or no income and assets: insurance and self-funding.
Self-funding means paying for long-term care out of your own pocket. This can be done with savings, investments, or retirement accounts. However, self-funding can be risky. If you run out of money, you may have to rely on Medicaid, which has strict eligibility requirements.
Self-funding future long-term care is riddled with potential pitfalls, making it a risky strategy for many individuals. One primary concern is the unpredictable nature of market performance. Assuming that one's investments will consistently generate the necessary funds to cover long-term care expenses can be akin to gambling with your health and financial well-being.
Market downturns, especially if they coincide with the period when care is needed, can severely impact the available funds. And, unfortunately, the need for long-term care often arises during economic recessions when personal investments are underperforming. The unpredictability of needing care during a market downturn can jeopardize the best-laid financial plans.
Tax Issues
Additionally, using personal investments to pay for care often comes with significant tax implications. Liquidating assets to fund care can trigger capital gains tax, and depending on the amount and type of asset, this could result in a hefty tax bill at a time when financial resources are already strained.
Moreover, draining assets means loss of potential future income from those investments reducing your lifestyle and that of your spouse. It also diminishes the inheritance that could be passed down to heirs. This double-edged sword – the loss of future income potential and the rapid depletion of assets meant for family or charitable legacies – underscores the challenges of relying on self-funding for long-term care needs.
LTC Insurance is a more predictable way to pay for long-term care. With insurance, you pay a monthly premium in exchange for a monthly or daily benefit that can be used to pay for care. LTC Insurance can also help protect your assets from being depleted by long-term care costs.
LTC Insurance Comes in Several Flavors
There are many different types of long-term care insurance policies available. Hybrid Long-Term Care policies have a death benefit, so you are guaranteed tax-free funds to pay for long-term care or a death benefit, perhaps both.
It's essential to compare policies carefully to find one that meets your needs and budget. Be sure the policy you are considering meets federal guidelines so you can enjoy the consumer protections, regulated benefit triggers, and tax incentives available through a qualified LTC policy.
If you're considering Long-Term Care Insurance, it's important to talk to someone who is a specialist in long-term care. They can help you assess your needs and find the right policy for you.
Bottom line: Don't wait to buy Long-Term Care Insurance. The sooner you buy, the more likely you are to qualify for coverage and the lower your premiums will be.
What to Consider Before Buying
Here are some additional things to consider when choosing between insurance and self-funding:
- Your age: The older you are, the more expensive LTC Insurance premiums will be.
- Your health: You may be denied coverage or charged higher premiums if you have a chronic health condition. Due to underwriting standards, get your coverage before you have significant health issues.
- Your financial situation: If you have a lot of savings or investments, you may be able to self-fund long-term care, but why would you place that burden on your family and risk hundreds of thousands of dollars when you don't have to? However, LTC Insurance is vital if you have under $2 million in assets - and most of us fall into that category.
- Partnership LTC Insurance: Most states offer Partnership policies that provide dollar-for-dollar asset protection. Even a small policy can greatly impact you and your family.
- Your family situation: Some adult children, especially daughters, might offer to be your future caregiver. However, this is a demanding and emotional job, and juggling a career, family, and caregivers is a huge burden. However, if you don't have children, LTC Insurance can provide peace of mind knowing that you'll have case management with someone watching out for your best interests and the peace of mind of knowing you can spend money in your retirement without regard to leaving money to pay for future long-term care.
Ultimately, whether to buy Long-Term Care Insurance is a personal decision. But it's important to weigh the pros and cons carefully before making a decision.
Chuck Greenblott, CLTC, is a specialist in long-term care and a Chartered Retirement Planning Counselor (CRPC). He has decades of experience as a financial advisor and helping clients plan for long-term care.