Whether to Buy Long-Term Care Insurance or Self-Insure

One of the toughest decisions to make concerning your retirement is how to deal with long-term care should you or your spouse need it. Long-term care is generally synonymous with custodial care that is received in a nursing home, assisted living community, or at your home. Long-term care is required when you need help with two or more activities of daily living (ADLs). The six ADLs are: (1) cooking, (2) eating, (3) bathing, (4) dressing, (5) using the toilet and maintaining continence, and (6) moving from place to place within the living environment.

Medicare pays for short-term medical care at home or for a limited stay in a nursing home after a hospitalization. Medicare does not pay for long-term custodial care so you are on your own for these expenses. Medicaid pays for long-term care but not until you have already spent the majority of your assets – not a promising position to be in when you are at your most vulnerable.

The feeling among many pre-retirees, however, is that they may not need such care and so it doesn’t make sense to buy an expensive long-term care insurance policy. I see three basic ways to handle long-term care: (1) Have a spouse / family member / friend help if you need this type of care; (2) Self-insure so that you pay out of your financial assets for these expenses; or (3) Purchase a long-term care policy that could cover these expenses. Of course, it is possible to combine these approaches for a strategy that feels right for you and fits your budget. My main point is that you should have a plan in place for long-term care well before you ever need it.

Care Provided by Family and Friends

The most prevalent method to deal with potential long-term care for yourself or your spouse is to rely on family or friends. This approach often occurs among married couples in which the husband is older and is in need of care and the wife fills this role. Sometimes there are some added expenses such as prescription drugs and physical therapy sessions but these should be covered by your Medicare coverage in retirement.

The question then becomes what happens if Mom needs care. Are other family members / children ready to step up and provide the care? Often Mom will live with one of the children, but this may be difficult to sustain if she needs skilled nursing care or care for mental impairment, such as dementia. The key point here is to think through the possibilities of how the family would provide care in different situations.

Self Insure

Another popular method is to self insure. You have sufficient assets to pay for long-term care should you need it. One way to handle self-insurance is to identify or segregate those assets that you would use for long-term care in a separate account and not include them as part of your retirement asset withdrawal strategy.

For example, the typical nursing home stay lasts about three years. In the DC area nursing care coverage can cost about $250-$300/day or about $100,000/year. Segregating or walling off about $300,000 (plus taxes if this money is in a tax-deferred account) of your assets and invest them in a moderately aggressive portfolio should hold you in pretty good stead. So if you have $1.5 million in retirement assets, $300,000 should be walled off and you will rely on the $1.2 million to fund your retirement. And if you don’t need the $300,000 it will be included as part of your estate for the benefit of your heirs.

One other consideration before you self insure is to consider how much of your estate you would like to leave to your heirs. If you want to leave some cash and/or assets to your children, for example, then you may not be able to fulfill these wishes if you use all of your retirement assets and the amount set aside for long-term care. A long-term care policy can provide some portfolio insurance to guard against depleting your assets and leaving little to your heirs.

Purchase a Long-Term Care Insurance Policy

The third option is to purchase a long-term care policy that would cover all or part of your expected long-term care expenses. Long-term care policies are generally sold as per day amounts (e.g., $250/day for 3 years). So the big decisions are how much coverage you can afford and what it will cover. A future blog entry will explain the important moving parts of long-term care insurance policies.

One final point I try to make with my clients who are on the fence between self-insuring and purchasing a long-term care policy is to obtain quotes for long-term care policies and then make the decision with more information. Often folks can combine the approaches in a much more coste effective means than strictly self-insuring or purchasing a long-term care insurance policy.


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