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Long-Term Care Needs: Self-Insuring Versus Long-Term Care Insurance

Aaron Vickar, 4/9/2013

Should those who are financially independent consider self-insuring for possible long-term care (LTC) needs?

Just because someone can self-insure doesn’t necessarily mean that they should self-insure. It depends on your family and your situation. You need to consider your financial goals, what you want to accomplish with your wealth and if you want to leave a legacy. Being able to self-insure is great. The risk is that you’ll spend all of your money and lose your financial independence.

How would you translate the term “self-insuring”?

Basically, someone who is self-insuring is able to pay for LTC out of pocket and still maintain his or her current lifestyle. It can be successful, but it’s somewhat limited. Someone who has saved $2 million to $3 million has a pretty good chance of retiring well and living a great life, but the need for LTC could derail that. Expenses for LTC can be enormous. Someone with $5 million or more has a greater chance of comfortably self-insuring. So, by that standard, not a lot of people are able to self-insure.

It becomes a question of whether you are prepared to pay for LTC out of pocket. Would you rather have some insurance to cover some of the costs? We don’t aim to insure all of the costs — because we don’t know what they are going to be until it happens — so LTC insurance is used as a supplement.

What could happen if someone doesn’t have LTC coverage and is not able to self-insure?

Somebody who doesn’t have enough to self-insure and isn’t willing to get LTC insurance has to understand the gravity of what could happen if a need for LTC occurs. It could mean spending $100,000 a year you weren’t expecting and not having enough money to afford your other expenses.

The worst-case scenario is you spend down all your assets and go on Medicaid. You’re out of money. You’re out of options. You’re doing whatever the state allows you to do. No one wants to be in that situation.

When it comes to self-insuring, are people setting money aside, or do they just have enough to cover the cost?

That’s the problem. People say they’ll plan for it, but to do that, they have to set aside that money and make sure it grows with inflation. More often, financially independent people have amassed enough wealth to cover a LTC need if it occurs, but they haven’t specifically saved for LTC.

Does LTC insurance cover anything besides nursing home care?

LTC coverage can be used for in-home care, assisted living facilities, hospice care or even recovery care. I think there’s a misconception that LTC insurance is only used for nursing home care. People say, “I’m not going into a nursing home, so I don’t need this coverage.” They don’t realize LTC insurance can actually be used for a broad range of care services.

How does planning for LTC needs help the entire family?

Planning for LTC supports the individual who needs long-term health care and considers the needs of the rest of the family. For married couples, this means addressing the needs of the healthy spouse who is acting as a caregiver, so that person still has a sound financial foundation. Adult children and children also affected when a parent or grandparent needs long-term care can focus on that loved one, instead of being overwhelmed by financial concerns.

It’s about having the ability to spend down assets, support the need for LTC and not run out of money —both for the person who needs LTC and the family members who do not. While the primary goal of this type of planning is to provide financial support, it also has another benefit — peace of mind that you’ve thought through what could happen, and you’ve prepared for it.