Can I self-insure for long-term care instead of buying insurance?

Can You Self-Insure for Long-Term Care Instead of Buying Insurance?

What if you had to write a check for $100,000 tomorrow? And another one next year? For many Americans, that's the potential reality of paying for long-term care. The U.S. Department of Health and Human Services estimates that someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years.

With the staggering cost of care, it's natural to wonder if there's a better way than buying a traditional insurance policy. For some, the answer is yes. Let's look at whether paying your own way—or self-insuring—makes sense for you.

Understanding Self-Insuring for Long-Term Care

Self-insuring is exactly what it sounds like: you are the insurance company. Instead of paying premiums to an insurer, you plan to cover any future care costs using your own savings💡 Definition:Frugality is the practice of mindful spending to save money and achieve financial goals., investments, and other assets💡 Definition:Wealth is the accumulation of valuable resources, crucial for financial security and growth.. You essentially create your own "long-term care fund."

This approach gives you maximum control and flexibility. You decide how your money is invested and how it's ultimately spent. But it isn't for everyone. It requires a solid financial foundation, a disciplined savings strategy, and a clear-eyed look at what the future might hold. It's also crucial to understand the potential tax implications of drawing down assets for long-term care expenses.

Who Should Consider Self-Insuring?

Self-insuring isn't a one-size-fits-all solution. Here are some key factors to consider:

1. You have a high net worth💡 Definition:Total assets minus total liabilities—the true measure of your financial health. If your net worth is north of $2-3 million, you're likely in a strong position to self-insure. You can probably absorb a $300,000 to $500,000 care bill without derailing your retirement💡 Definition:Retirement is the planned cessation of work, allowing you to enjoy life without financial stress. or short-changing your heirs. Remember to factor in inflation when estimating potential care costs. A $500,000 expense today could easily balloon to $750,000 or more in 10-15 years.

2. You have significant liquid assets💡 Definition:Assets that can be quickly converted to cash without losing value—like savings accounts, stocks, and money market funds.. Even with a net worth between $200,000 and $2 million, self-insuring could work if you have cash ready. You don't want to be forced to sell investments at the wrong time just to pay💡 Definition:Income is the money you earn, essential for budgeting and financial planning. for a home health aide. Ideally, you should have enough liquid assets to cover at least 3-5 years of estimated care costs without touching your retirement accounts or other long-term investments. For example, if you anticipate needing $80,000 per year in care, you'd want to have $240,000 - $400,000 readily available.

3. You have a high tolerance for risk💡 Definition:Risk is the chance of losing money on an investment, which helps you assess potential returns.. Are you comfortable with the possibility of spending down a large chunk of your assets? Self-insuring means accepting the risk that your care needs could be more extensive—and expensive—than you planned for. Consider running "what-if" scenarios. What if you need care for 7 years instead of 3? What if the cost of care increases by 5% per year instead of 3%? How would these scenarios impact your financial plan💡 Definition:A spending plan that tracks income and expenses to ensure you're living within your means and working toward financial goals.?

4. You have a diversified investment portfolio. Don't put all your eggs in one basket. A well-diversified portfolio can help mitigate the risk of market downturns impacting your ability to pay for care. Consider a mix of stocks, bonds💡 Definition:A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments., and real estate, and rebalance💡 Definition:The process of realigning your investment portfolio back to your target asset allocation by buying and selling assets. your portfolio regularly to maintain your desired asset allocation💡 Definition:The mix of different investment types in your portfolio, determining both risk and potential returns.

Cost of Long-Term Care

The numbers can be eye-watering. According to the 2024 Genworth Cost of Care Survey, the average annual costs are a serious wake-up call. Keep in mind that these are just averages, and costs can vary significantly depending on your location and the level of care you need.

• Assisted Living💡 Definition:Housing for people who need help with daily tasks but not round-the-clock medical care.: $70,800
• Home Health Aides: Up to $77,792
• Skilled Nursing Facilities: $111,325 (semi-private) to $127,750 (private room)

The average person needs about three years of care. However, about 20% of individuals will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. require care for longer than five years. Do the math, and you could easily be looking at a total bill of $350,000 or more. And remember to factor in inflation! A 3% annual inflation rate💡 Definition:General increase in prices over time, reducing the purchasing power of your money. can significantly increase these costs over time. For example, at a 3% inflation rate, the cost of a semi-private room in a nursing home💡 Definition:24-hour skilled care in a licensed facility for people with significant medical or custodial needs. could reach $150,000 per year in just 10 years.

Strategies for Self-Insuring

If you're considering self-insuring, here are some strategies to consider:

• Dedicated Savings Account: Create a dedicated savings account specifically for long-term care expenses. This helps you earmark funds and track your progress. Consider a high-yield savings account💡 Definition:A savings account that pays significantly higher interest rates (typically 4-5% APY) than traditional bank accounts (0.01% APY), usually offered by online banks. or a certificate of deposit💡 Definition:The initial cash payment made when purchasing a vehicle, reducing the amount you need to finance. (CD) to earn a bit more interest.
• Health Savings Account💡 Definition:A tax-advantaged savings account for medical expenses, available only with high-deductible health plans. (HSA): If you have a high-deductible health plan, contribute to an HSA. The money grows tax-free, and you can use it for qualified medical expenses, including long-term care.
• Investment Account💡 Definition:A brokerage account lets you buy and sell investments, helping you grow wealth over time.: Allocate a portion of your investment portfolio to a conservative, income-generating strategy. This can provide a stream of income to help cover care costs.
• 💡 Definition:The portion of your home's value that you actually own (market value minus mortgage balance)Home Equity💡 Definition:The portion of your home's value that you actually own, calculated as home value minus remaining mortgage balance.: Consider a reverse mortgage or a home equity line of credit💡 Definition:A revolving credit line secured by your home equity, allowing you to borrow money as needed up to a preset limit. (HELOC) as a potential source of funds. However, be aware of the risks involved, such as foreclosure💡 Definition:Foreclosure is a legal process where a lender reclaims property due to unpaid mortgage debt, impacting credit and homeownership. if you can't repay the loan.
• Life Insurance💡 Definition:Life insurance protects your loved ones financially after you pass away, ensuring their needs are met. with a Long-Term Care Rider: Some life insurance policies offer riders that allow you to access a portion of the death benefit💡 Definition:The lump sum paid to beneficiaries when the insured person dies. to pay for long-term care expenses.

Real-World Scenarios

Let's imagine a couple, both 65, with a combined net worth of $3 million, including $500,000 in liquid assets. They estimate they might need $400,000 for future care. By self-insuring, they skip paying $2,100 to $3,600 in annual insurance premiums. But, they must keep enough cash accessible to cover that $400,000 without having to sell the house or disrupt their retirement lifestyle. They might choose to allocate $400,000 in a brokerage account, invested in a mix of dividend💡 Definition:A payment made by a corporation to its shareholders, usually as a distribution of profits.-paying stocks and bonds, to generate income and help offset the cost of care.

Now consider someone with a $500,000 net worth, including only $50,000 in liquid assets. The choice is much tougher. Earmarking most of their assets for potential care could leave little for their spouse or children and create immense financial stress. They might be better off purchasing a long-term care insurance policy to protect their assets and provide peace of mind. Alternatively, they might explore options💡 Definition:Options are contracts that grant the right to buy or sell an asset at a set price, offering potential profit with limited risk. like a shorter benefit period💡 Definition:How long your disability insurance will pay benefits once a qualifying claim is approved. or a lower daily benefit to reduce the cost of the policy.

Common Mistakes and Considerations

• Underestimating the timeline. It's easy to plan for the average, but what if you're not average? Around 20% of people need care for more than five years. Hope for the best, but prepare for a longer, more expensive scenario. Consider using a long-term care calculator to estimate your potential needs based on your health history and family history.

• Forgetting about inflation. The cost of care is rising much faster than a gallon of milk. Your financial plan must account for this, or your savings will fall short when you need them most. The historical average inflation rate for long-term care costs has been around 3-4% per year.

• Ignoring Medicaid. If your net worth is below $200,000, you might eventually rely on Medicaid. It's vital to understand the strict rules for Medicaid eligibility and what it does—and doesn't—cover. Medicaid has strict income and asset limits, and it may require you to spend down your assets before you become eligible. Also, Medicaid may not cover all types of care or all facilities.

• Assuming family will step in. Many people avoid making a plan, thinking a spouse or child can be their caregiver. This can place an incredible emotional and financial burden on loved ones if it's not discussed openly first. Caregiving can be physically and emotionally demanding, and it can also impact the caregiver's own career and finances. Have an open and honest conversation with your family about your expectations and their ability to provide care.

• Failing to plan for the unexpected. What if you need care sooner than you anticipated? What if you develop a chronic illness that requires ongoing care? Your financial plan should be flexible enough to adapt to unexpected events.

• Not considering alternative care options. Long-term care isn't just about nursing homes. Explore other options like assisted living, home health care💡 Definition:Skilled nursing or personal care delivered in your home by licensed professionals., and adult day care. These options may be more affordable and provide a better quality of life.

Bottom Line

So, is self-insuring a smart move? For those with substantial wealth and an appetite for risk, it can be a perfectly valid strategy. You avoid premiums and keep your money under your own control. It also offers flexibility in choosing care options and providers.

For most people, however, it's a gamble. It demands rigorous planning and an honest look at the potentially massive costs. It also requires a disciplined savings strategy and the ability to adapt to unexpected events.

The right decision depends entirely on your finances, your comfort with risk, and your goals for the future. The best first step is an honest conversation with your family and a qualified financial advisor to build a plan that protects you and the people you care about. A financial advisor can help you assess your 💡 Definition:Risk capacity is your financial ability to take on risk without jeopardizing your goals.risk tolerance💡 Definition:Your willingness and financial ability to absorb potential losses or uncertainty in exchange for potential rewards., estimate your potential care costs, and develop a comprehensive financial plan that addresses your long-term care needs.

Key Takeaways

• Self-insuring for long-term care involves using your own assets to cover care costs instead of buying insurance.
• It's best suited for individuals with a high net worth, significant liquid assets, and a high tolerance for risk.
• The cost of long-term care can be substantial, and it's important to factor in inflation.
• Consider strategies like dedicated savings accounts, HSAs, and diversified investment portfolios.
• Avoid common mistakes like underestimating the timeline, forgetting about inflation, and assuming family will step in.
• Consult with a financial advisor to develop a comprehensive plan that addresses your specific needs and circumstances.