When considering self-insurance for long-term care, multiple factors need to be considered. Instead of questioning if they will require long-term care, many people are pondering when they will require it. The challenge then becomes determining how to finance that care when needed.
According to LongTermCare.gov, a website run by the U.S. Department of Health and Human Services, nearly 70% of people who live to 65 years old will need long-term care and assistance at some point in their lives. Moreover, 20% of these individuals will require such care for over five years. These statistics highlight the importance of planning and making informed decisions regarding long-term care financing options.
The primary options for funding long-term care needs are self-insuring or purchasing long-term care insurance policies. Self-insuring involves setting aside personal funds to cover care costs when necessary. In contrast, long-term care insurance provides financial assistance to pay for essential at-home services or nursing home care. It is crucial to carefully consider all your options before making a decision regarding which choice will benefit you the most.
Opting for self-insurance allows individuals to avoid insurance premiums, which can be advantageous if they require minimal care or no care. Additionally, insurance policies may not provide full coverage for those needing significant long-term care due to policy limits and restrictions. The benefits offered by policies can range from two years to the insured individual’s lifetime, according to the Insurance Information Institute.
However, self-insuring also carries the risk that individuals may require more care than anticipated, potentially depleting essential funds or inheritance earmarks.
Navigating this decision requires careful assessment of various factors such as personal finances, asset portfolio, policy costs, life expectancy, health history, and risk tolerance. Deciding the most suitable way to fund long-term care requirements is not a precise science. To assist in the decision-making, seven key questions should be considered when contemplating self-funding for long-term care.Â
These questions revolve around factors such as one’s net worth, suitable timing for decision-making, the amount to set aside for self-funding, the composition of assets, the accuracy of assumptions made about life expectancy and potential care requirements, the availability of middle-ground options like hybrid policies, and the importance of peace of mind in the decision-making process.
Here are the seven questions you should ask yourself.
#1 Who is a suitable candidate for self-insuring?
While there is no specific threshold for net worth or assets, wealthier individuals, particularly those without dependents, may be better positioned to self-insure. If you have sufficient assets to cover potential care expenses, which can be costly, then this option may be better suited for you.
#2 How long can you delay making a choice?
Long-term care insurance rates are typically most favorable between ages 55 and 65. After reaching 70, finding and obtaining a policy may become challenging.
#3 How much should you allocate for self-funding?
Determining the exact amount needed for self-funding is complex, and factors such as current care costs, inflation, life expectancy based on family history, and projected returns must be considered. According to Genworth’s Cost of Care Survey, in 2021, the typical monthly cost for a home health aide was around $5,100, assisted living facilities cost an average of $4,500, and semiprivate rooms in nursing homes cost approximately $8,000 monthly.
Comparatively, long-term care policies vary in cost. As per the American Association for Long-Term Care Insurance, a 55-year-old male purchasing $165,000 of benefits available for immediate use can expect to pay around $900 annually. A 3% annual inflation growth option would increase this cost to $2,100. For a female of the same age seeking similar benefits, the premiums would be $1,500 and $3,600, respectively.
#4 What is your asset mix?
Even individuals with high net worth may not be suitable for self-insurance. Factors such as dependents, the desire to leave an inheritance, philanthropic inclinations, and the liquidity of assets all influence this decision. Would you contemplate selling significant assets, like a house, to cover long-term care costs? If you answer no, the insurance option might be better for you.
#5 Are your assumptions realistic?
Avoid making assumptions solely based on life expectancy or the lack of certain long-term illnesses. Assuming an early demise due to a parent’s experience or neglecting the possibility of diseases like Alzheimer’s, particularly if they run in the family, can have severe financial consequences. Realistic expectations are vital to sound planning.
#6 Is there a middle-ground option?
You may discover stand-alone long-term care policies with reasonable rates or hybrid policies combining life insurance and long-term care coverage by exploring various options. Hybrid policies may be costlier but offer a larger death benefit if long-term care services go unused.
Alternatively, consider a smaller long-term care policy while self-insuring some projected costs. This way, you avoid paying excessive premiums for coverage that may not be fully utilized.
#7 How important is peace of mind?
For some individuals, the emotional aspect of planning is crucial. Even if the numbers indicate sufficient assets to cover care costs, the peace of mind with insurance coverage may outweigh self-insuring risks.
Deciding to self-insure or purchase a long-term care policy is a personal choice that depends on individual comfort levels and priorities. When making this decision, it’s important to consider financial factors, risk tolerance, and personal preferences. By thoroughly assessing these factors, you can make a well-informed decision that meets your requirements.