Self-fund vs long-term care insurance

Intro

If you have a high net worth, there are three main ways to manage the risk of long-term care costs:

• Purchase insurance – This offers lower risk with less financial upside if you don’t need care.
• Self-fund (self-insure) – This offers higher risk with the potential for more financial upside if you don’t need care. Self-funding is a bit like poker—it’s a gamble with risks.
• Rely on MedicAID – Typically a last-resort option, MedicAID can help cover LTC costs but is limited to cases of severe financial hardship or disability. Eligibility is based on strict income and asset requirements.

This decision isn’t just about the numbers—it’s about your family, your desire for peace of mind, and the life you envision for your later years.

In this post, we’ll explore key considerations and strategies to help you decide if self-funding is the right choice for you. There’s no one-size-fits-all answer—this is a deeply personal decision.

Remember to use the letters LTC as a guide to achieve these goals: Learn about options, Talk with family, and Create a plan. When you decide to buy LTCi or self-fund, add this to your plan and communicate it with your family.

What is self-funding?

Self-funding, or self-insuring, just means you're planning to pay for care yourself without draining your savings or throwing off your financial plans.

Are you healthy?

First, consider if you can qualify for LTC insurance. Health conditions might make you ineligible, leaving self-funding as your only option.

Save time by getting pre-qualified before going too far into the process of shopping for LTCi.

Can you afford to self-fund?

While there’s no hard rule, many advisors suggest having at least $3 million in net worth, excluding home equity.

It also depends on your spending rate and how much you can set aside for care without impacting retirement goals. Use a retirement calculator to check if your assets can cover long-term care, factoring in your lifestyle and care needs.

Tax considerations

Self-funding can be extra expensive due to taxes, while LTC insurance benefits are typically tax-free.

Let's look at a few sources and their rough costs to pay for $1.00 of long-term care. Obviously, these details will vary for each person.

For example:

• IRA - You might withdraw $1.30 and get taxed $.30, leaving you $1 to pay for LTC costs.
• LTCi - You might spend $.25 to receive $1 in benefits to pay for LTC costs.

Risk tolerance

The choice between LTC insurance and self-funding ultimately comes down to risk tolerance.

Check out this fun 1-minute clip about the extremes of risk tolerance.

Family considerations

Family dynamics play a significant role in planning for long-term care. If you choose to self-fund and your LTC costs exceed expectations, it could lead to:

• Increased caregiving responsibilities for family or friends, potentially adding stress to their lives.
• A reduced inheritance for your family, as more of your assets may be directed toward care expenses.

Open communication is key. If self-funding is your preferred approach, having a candid conversation with your loved ones now can help set expectations and avoid misunderstandings in the future.

Insuring your portfolio

One key argument in favor of buying LTCi, even if you can afford to self-fund, is that it protects the investment portfolio.

Market volatility

The market generally delivers strong returns over time. However, the journey is marked by major bumps along the way.

Why it matters:
Market downturns can make self-funding care risky. If you need care during a slump, you might be forced to sell investments at a steep discount. LTCi acts as a safeguard, protecting your savings when markets are unstable.

Diversification

LTC insurance adds balance to your financial plan, acting as a safety net against high care costs, similar to how savings accounts or CDs help manage risk.

Long-term care insurance

Consider a few key factors about LTCi when comparing it to self-funding.

Instant leverage

LTC insurance offers leverage that self-funding can’t. For example, $100k in premiums could turn into $300k to $500k in coverage immediately.

It’s rare to achieve an immediate 3x-5x return from any investment. Plus, LTCi benefits are tax-free, and it provides coverage if you need care before age 65—a scenario that’s more common than you might think.

Hybrids

If you choose insurance, consider a hybrid policy with cash indemnity so that if you don't need care, your family gets back your paid premiums as a death benefit.

Internal rate of return (IRR)

Some hybrid LTC policies show the internal rate of return (IRR) when benefits start. IRR reflects the annual tax-free return on your premiums if you use all your LTC benefits.

Example

A 50-year-old healthy male makes a one-time $100,000 premium payment for a 6-year hybrid policy with 3% compound inflation protection. Here's how his guaranteed benefits grow over time:

In this scenario, starting LTC benefits at age 60 yields an 18% annual return on the $100,000 premium.

Key takeaways

• If you use all of your LTC benefits: You get a 10%-ish, guaranteed tax-free return, which you can't get in the market.
• If you don't use any LTC benefits: Your family receives a death benefit, typically resulting in a lower IRR of 1%-ish.

Put another way, if you use your benefits, you win. If you don't, you still get your money back.

Scenarios

Let’s walk through a few financial scenarios where, at age 50, you either

• spend $100k on a hybrid LTCi policy
• self-fund

Great health

You never need long-term care and remain healthy until you pass away.

• If you own insurance: Your family receives your death benefit of $150k, equivalent to about a 1% return on your money.
• If you self-fund: Your family probably receives more than $150k (the value depends on your annual investment return).

Winner: Self-funding.

Poor health

Imagine receiving an Alzheimer’s diagnosis at age 70, requiring memory care for 15 years. The financial costs alone could reach $2 million.

• If you own insurance: Your policy provides $1 million in benefits from your $100k premium, equivalent to about a 10% tax-free return on your money. You spend $1 million of personal funds to cover the rest.
• If you self-fund: You spend the full $2 million of personal funds.

Winner: Insurance.

Scenario review

Generally, if you require long-term care, insurance often provides better support; if you don’t, self-funding may be the better financial choice. Unfortunately, we don't have a crystal ball to predict our future health.

The wrong way to plan

In online forums about long-term care, you might come across dark humor or extreme "solutions" for aging challenges.

While these comments reflect real fears about aging and care, it’s important to approach the future with thoughtful planning.

Long-term care isn’t end-of-life care (that’s hospice). While you might face challenges like getting out of bed or tying your shoes, you can still enjoy meaningful moments—meeting your great-grandchild, pre-boarding at the airport, or binge-watching Friends reruns.

Middle of the road option

If you want a balanced approach, consider getting some LTC insurance but not enough to cover everything, like 20 years of memory care.

A smaller policy helps with big costs, while self-funding gives you flexibility. This way, you get protection without over-insuring, maintaining a good balance between coverage and financial freedom.

If you self-fund

If you decide to self-fund, it’s smart to earmark some of your assets for long-term care. Having a separate bucket for those costs can help you stay prepared. Make sure to let your family know about this plan so everyone’s on the same page.

Wrap up

Deciding between self-funding and LTC insurance isn't just about money—it’s about how you see your future, protecting your loved ones, and how much risk you're willing to take.

The key is having a plan that fits your goals and values. Planning isn't about knowing what will happen; it's about being ready for anything life throws your way.