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An alternative to LTCI: Self-funding

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One of the most important pieces of end-of-life planning for most clients is long-term care insurance. With Americans living longer and health care costs continually rising, long-term care can be a truly scary expense.

According to a study published by Yale University, a modest 5 percent annual increase in health care costs could mean that long-term care could run $400,000 per year 30 years from now. The average length of a long-term care situation is now four years, but there is reason to believe that advances in medicine might extend that for the next generation.

So we could be looking at what for some people might be a million-dollar expense, which is why so many people buy long-term-care insurance. But there is a growing chorus claiming that it’s possible, and even preferable, to self-insure for this expense.

Is it the best option for your clients? Here are some factors to consider:

Not everyone will need long term care. According to a recent article in Forbes, one in three current 65-year-olds will require no complicated care at all before death. Given advances in medicine, it’s possible that the percentages will be even higher for younger people.

The amount set aside for LTC insurance could end up going to one’s heirs, of course. But it’s also possible that the client would be able to use those assets for things other than long-term care during his or her lifetime.

If you start young, it doesn’t take that much return to equal the insurance. A standard LTC policy covers three years of care, and provide about $164,000 worth of coverage, according to the American Association for Long Term Care Insurance. A 25-year-old can buy such a policy for about $53 a month.

Suppose that same 25-year-old invests $53 a month in a mutual fund that returns an average of 5.5 percent annually. By the time that person is 75, and potentially in need of long-term care, he or she would have more than $165,000 in the bank, or more already than the value of the LTCI. By the time that person is 80, the insurance fund would be worth about $225,000. But this requires very long-term discipline. By the time he or she reaches the age of 75, that 25-year-old would have had to make 600 consecutive monthly payments of $53, despite illness, job loss, college tuition, or any other hardship. That’s easier said than done. Clients should assess their ability to make such regular payments realistically.

The self-insured don’t have to worry about claims being denied. It’s not hard to find horror stories from people who paid thousands in LTC premiums, over the course of decades, only to find their claims denied, or at least delayed. This is never an issue for the self-insured.

The client may need long-term care before the self-funding mechanism is ready to accommodate it. It’s well and good for a client to invest with the goal of having long-term care needs fully funded by age of 70. But what happens if that person is in a car accident at age 55, and confined to a wheelchair? A long-term care policy would cover that person, but the self-funded investment probably wouldn’t.

The cost is impossible to predict. The first question that any client attempting to self-insure needs to ask is how much money he or she is targeting for the insurance fund. But this can be a tricky question. A standard policy, as noted above, has a value of about $164,000. But the actual cost of care might be $100,000, or it might be $1 million.

It need not be an all or nothing proposition. Clients who are truly concerned about covering their long-term care costs, and are young and disciplined enough to self-insure, might consider purchasing a modest LTCI policy. That would permit them to regularly set aside a small amount of assets to save for cases of extreme emergency. As with most such decisions, the best solution may be to leave as many options open as possible.


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