Should Wealthy Individuals Self-Insure for Long-Term Care Needs?

When it comes to paying for long-term care, those without significant resources typically count on Medicare and Medicaid systems to pay for such care.  Middle-class individuals are often aware that an extended illness could quickly wipe out their resources, and thus elect to purchase long-term care insurance (LTC).

On the surface, it would seem that if you have a large enough nest egg, that you can afford to bypass insurance coverage and self-insure, but to assume this may be short-sighted, as several years of care could quickly erode your assets, leaving you economically vulnerable, and wiping out any inheritance you may have planned on leaving your family.  Thus it is worth your while to reconsider the issue before you make a decision.

There are a number of issues that need to be considered when considering whether or not you have a need for LTC.  The first is the daily cost that is used for projected cost assumptions.  People that live a comfortable lifestyle and have financial resources typically expect high-end nursing care as well.  The national average cost of a private room in a high-end nursing home is $347 daily.  The cost for a home health aide averages $27 an hour; on a 24-hour basis, such care would cost $650 a day or $236,500 per year.  If you live in an expensive area such as California or New York, those costs can be considerably higher.

Other costs that are often not factored into the cost to self-insure include the costs of asset liquidation (to pay for care) and tax costs, and the loss of investment opportunity on funds liquidated.

Let me illustrate this point:

Betty and John Smith are 55 and 57 respectively, are fully invested and estimate it will cost them 10 percent to liquidate assets to pay LTC costs.  Let’s assume that John needs six years of care beginning in year 18 of a 30-year estate plan, and assume a $300 per day cost adjusted for inflation at a 5 percent rate per year.  Betty will survive John by 7 years and will not need care.  Their net cost for premium on a LTC policy for both of them is $353,000 assuming an annual premium of $8000 (the net cost = $184,000 in total premium over 30 years + loss of investment opportunity on the premium equal to $121,000, and future value of LTC costs not covered during a 30-day elimination period - $48,000).   Estimated after-tax rate of return on the investment portfolio is 6 percent.

As the above chart illustrates, if they were self-insured, their total costs to provide care for John would skyrocket to $3.5 million!  The $3.5 million is broken down as follows: care provider costs ($1.7 million), asset liquidation and tax costs ($200,000), and loss of investment opportunity on funds liquidated to pay LTC costs ($1.6 million). 

Choosing to be self-insured cost the Smiths 10 times as much as had they purchased good insurance.  Premium break-even occurs in this example when the carrier has paid claims to one of the insured for 385 days.  If only one is insured, the break even would occur after about 180 days of claim payments.

Now imagine how much worse the above scenario could have been if John’s illness occurred during a year when portfolio performance was down.  Liquidated principal from the estate to pay for care could seriously reduce what is left for the surviving spouse or other heirs.  A couple that thought they had provided well for their twilight years could find themselves adjusting their lifestyle downward or even struggling to get by.

There are additional reasons that you should consider LTC insurance.  Good LTC policies afford significant benefits and features that are important to anyone, wealthy or not! 

Chronic illness or a disability at any age is a family crisis and knowing what to do and where to go can be overwhelming.  The care coordination feature of a good LTC policy can provided support and assistance with obtaining necessary services and designing a plan of care.  This assistance can be of significant value. 

In spite of all the reasons a LTC policy might make sense for you; many individuals may still think that they will never need LTC.  They hate writing a check for something they don’t think they will ever use.  Truth be told, if they don’t use most traditional or conventional LTC policies, the money is gone. 

Fortunately there are more options available than ever to address the need for LTC.  In addition to stand-alone policies, new products are being created that can allow you to combine LTC benefits with either life insurance or annuity/retirement income benefits.   By combining benefits into one contract, you can protect your future financial security, your estate, or both.

With proper planning, a reallocation of your existing assets can provide protection against the financial drain of an extended illness, without a negative impact on your income or legacy.

If you’d like to keep up with important money issues relevant to retirees and senior investors, sign up for a free monthly subscription to our SeniorFinances newsletter.