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Self Insure for Long Term Care: The Ultimate Guide

Most Americans turning 65 will need long-term care at some point. That’s according to the Administration for Community Living at the U.S. Department of Health and Human Services. Long term care entails a variety of support services that help you meet personal care needs should you be unable to. This makes it possible for chronically ill or aging individuals to live as independently as possible even when they can no longer perform daily activities on their own.

The average driver will make a vehicle collision claim once every 18 years. The odds of dying in a vehicle accident are even lower (1 in 103). The probability that you may lose your home is comparatively lower. And yet we all need to purchase automobile and homeowner insurance as a legal necessity (at least in most states). It makes even more sense that you should plan ahead and self insure against the very high risk of needing long term care.

Cost of Long Term Care

Long term care services are insanely expensive, which makes it even more important to plan ahead. This is a breakdown of national 2020 costs based on Genworth’s cost of care survey.

2020 annual cost of long term care services

Care Type/FacilityAnnual Cost of Long Term CareProjected Cost in 2030
Homemaker Services$53,768$73,260
Home Health Aide$54,912$73,797
Adult Day Care$19,240$25,857
Assisted Living Facility$51,600$59,346
Semi-Private Nursing Home Room$93,075$125,085
Private Nursing Home Room$105,850$142,254

The average period during which an American citizen aged over 65 years will need long term care is 2 years. This means that the total cost of care for those who went to a private nursing home room would add up to $211,700 ($105,850 x 2). Worse still is the fact that this cost is climbing up with time. By 2030, the same private nursing home room will cost almost $300,000 for two years.


Given that needing long term care (and there is a high risk that most of us will need it) could puncture a $211,700 hole in your finances, it is important to have some kind of coverage. Based on your financial situation, needs and preferences, you may choose to purchase a policy from an insurance company or self insure for long term care.

Should I Self Insure for Long Term Care?

Putting away part of your assets or income is a reasonable option to protect against big-budget long term care expenses. But self-insurance for long term care is not a good option for everyone. Below are some steps you can follow to determine whether you are the right person for this course of action.

Step 1: Grasp the risk of needing care

The goal of insurance – any form of insurance – is to guard against unpredictable life occurrences. If you are going to self insure for LTC, you need to know what risks you are protecting from. According to the national body mandated with providing long term care information, there is a 50% lifetime chance that you will need long term care services. This risk increases with age, going up to 70% for Americans who are turning 65 today. Given this real and massive risk, it is indispensable that you take measures to prevent a financial crisis in old age.

Step 2: Get a good impression of the possible cost of care

Getting a hold of the numbers (in terms of cost of care) is just as important as understanding your risk for needing long term care. The 2020 annual cost of long term care services table we highlighted above is a good place to start. Keep in mind that by the time you need care, these costs will have increased significantly. For example, a private nursing home room that goes for $105,850 today will go for $142,254 in 2030, and $191,177 by 2040.

Step 3: Consider your family

Now that you know the risks and understand the costs, it is important to factor in your family members or dependents when deciding whether or not you should insure for long term care. If you have a spouse or other close family member who might depend on you, then the potential financial implication will multiply. You may also have other family-related financial implications that would still come into the picture by the time you required long term care.

Step 4: Accommodate worse-case scenarios

The average duration of long term care is 2 years. Most people make cost projections based on this average. But a huge percentage of Americans who enter nursing homes will stay there for much longer. For instance, 10% of nursing home occupants will stay for 5 or more years. Using 2020 numbers and given a 5-year duration, the total cost of care would add up to $529,250($105,850 x 5). It is important to consider a prolonged long term care duration and evaluate whether you might still be able to keep up with the cost.

Step 5: Assess your assets and income

Most Americans use their income to pay for long term care. Thus, determining whether to self-insure should be a question of liquidity, not solvency. While it may be possible to sell assets in order to offset long term care costs, this may not be such a good option. Selling assets can be expensive plus it can also jeopardize your overall financial planning strategies. Consider whether you might have enough income to pay for care. Also, put into account the implications of liquidating assets (including illiquid assets such as real estate) to cover an income shortfall when paying for long term care. If you have very high networth can easily offset long term care costs without denting your financial standing, then it makes sense to self-insure.

Step 6: See if your retirement plan can help

For some people, the retirement funds may help cover long term care expenses. Check your portfolio to see whether it can easily cover ongoing living costs based on a reasonable withdrawal rate strategy, as well as pay for additional long term care costs. If the answer is yes, then you have enough assets to self-insure. If not, then you might need to look for insurance or some other type of coverage against long term care.

Step 7: Separate your LTC fund from other assets

If you decide that self-insuring is the right option for you, the next step is to separate the LTC fund from your other retirement assets. Consider creating a specific fund that is solely dedicated to potential long term care expenses. This serves as a resource to protect you from LTC-related financial chaos. If it turns out that you don’t need long term care, after all, you can easily pass the money to your beneficiaries.

Risks of Self Insuring for Long Term Care

Self insuring for LTC is a great option for those who have sufficient financial resources. But mistakes are possible and it is important to know what to look out for:

1.   Making misleading assumptions

Faulty assumptions can lead to expensive mistakes. Assuming that you should insure just because you have more than $1 million in assets may not be the right approach. Take into account your family members, other unforeseen financial obligations, and worse-case scenarios. Consider what impact using your assets to pay for long term care would have on your financial plans.

2.   Impact on legacy plan

Many people with a high net worth have a legacy plan that determines where their money goes after they die. Evaluate whether choosing to self insure for long term care may negatively impact your legacy plan. Money that was otherwise planned for charities and family members could end up paying care expenses. Is this something you would be willing to accept?

3.   Forgetting care coordination

Even if you have put the assets aside to self insure for long term care, there are still a lot of unexpected things that can occur that ought to be accounted for. There may be informal caregiving expenses involved. An adult child may need to coordinate or help with care, possibly disrupting their earnings and income. Family members who are focused on inheritance may be worried about the high cost of professional care, even if there is enough money to pay for it.

4.   Timing and investment liquidity

The 2008 financial crisis taught hard lessons on financial planning. External influences such as human behavior, systematic failure, high-risk incentives, and regulatory failures can lead to full-blown economic depression. The situation may turn upside down if you ended up needing long term care at a time like this. Your income may be severely depleted and you may be forced to sell whatever assets are available at market lows. This is another risk of self insuring that needs to be carefully considered before you choose to take this path.

Alternatives to Self Insuring for Long Term Care

Americans (particularly high net worth individuals) who decide that self-insurance is not for them have a number of alternatives.

  • Traditional LTC insurance – this is a conventional type of insurance that has been in place for decades. You pay premiums in exchange for protection/coverage should you end up needing long term care. Traditional LTC insurance works in either of two ways: eliminate all the risk with lifetime coverage or take away some of the risk with a limited plan (e.g. with a 4 or 5 year LTC plan).
  • Hybrid LTC – a hybrid long term care policy essentially combines the benefits of a life insurance policy with long term care benefits. If the policyholder ends up needing long term care, then the policy will cover part or all the expenses. If long term care is not needed, then the policy works like traditional life insurance where a death benefit is paid to beneficiaries of the policyholder upon their demise. Unlike life insurance policies that feature a ‘use-it-or-lose-it’ approach (you lose your premiums if you do not need long term care), hybrid LTC plans provide a balanced approach where you benefit from the policy either way (whether or not you end up needing LTC).

FAQs

What is self insuring?

This is a financial strategy that involves setting money aside to cover an unpredictable risk. In the case of long-term care, self insurance ensures that you have enough financial resources to cover the cost of care at home, nursing home, adult day care, or other LTC facilities. Self insuring may be a reasonable option for Americans who have a high net worth.

How much money do I need to self insure long term care?

How much savings you need to self insure for long term care should be determined by expected care expenses. If you may prefer to receive long term care at home, a home health aide costs $54,914 and a private nursing home goes for $105,850 annually (as of 2020). Keep in mind that the average duration of care is 2 years. This means you would need to have at least $109,828 ($54,914 x 2) for two years of home-based care and $211,700 for a private nursing home room. While setting money aside to self insure for long term care, keep in mind that some people may end up needing health services for 5 years or even longer. The goal is to make sure that you have enough money set aside for all possible eventualities.

Long term care insurance vs self insure?

Self insuring entails setting money aside to cover your own long term care (should you need it). Long term care insurance, on the other hand, entails buying a policy and paying premiums at an insurance company in exchange for coverage. Purchasing insurance tends to be the most reasonable (and best) option for most Americans. However, if you have enough finances and assets to offset potentially massive long term care costs, then self insurance is a good option.

How to self insure long term care average long term care stay?

The average long term care stay takes 2 years. Using 2020 cost of care estimates, the total cost for this duration can range from $107,536 to $211,700 depending on the type/facility of care. Keep in mind though that these costs are climbing up at a very high rate. In 2030, the same nursing home room that now goes for $211,700 (over 2 years) will cost an estimated $284,508. It is important to take into account this cost increase while creating your self-insurance plan.

Best long term care insurance companies 2021?

Long term care insurance is a great way to protect your retirement peace of mind and savings from the exorbitant cost of LTC. You may choose to go with a traditional LTC policy or a modern hybrid LTC plan. Some of the best insurers for long term care policies include Nationwide, Lincoln, OneAmerica, and Northwestern Mutual.

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