Meet Diane. She is a 50-year-old successful professional with $1.5 million in liquid assets, including cash, brokerage accounts, and retirement accounts.
Her financial planner told her, “You’re young and healthy; let’s just keep $500,000 liquid in your brokerage account to self-fund if you ever need long-term care (LTC). Why pay an insurance company?”
Diane had a gut feeling this was a gamble. She didn’t want her assets to be eaten up by long-term care expenses. She wanted her wealth to be her children’s inheritance.
Let’s explore two approaches to analyzing this decision.
The Self-Fund Gamble
The Strategy: Diane keeps $500,000 in a conservative account.
The Opportunity Cost: That $500k is frozen. Not to be tapped for other expenditures. She can’t invest it aggressively because she might need it for a health crisis. Over 30 years, the loss of potential growth may total many thousands of dollars.
The 2056 Reality: If Diane needs care at age 80, the projected cost of a private room in a nursing home will be $323,948 per year. Her $500k would be gone in less than 19 months.
The Legacy: Her children inherit whatever may be left over after care costs and the IRS takes its cut.
Transfer The Risk Insurance
The Strategy: Diane uses a 10-Pay premium option. She pays $8,500 per year for exactly 10 years. Premiums are guaranteed never to increase. Part of her premium may be deductible from federal taxes because she itemizes her expenses.
Total cost: $85,000.
The Immediate Benefit: She creates a tax-free LTC benefit that starts at $231,724 and LTC monthly benefits of $4616. The product design includes a tax-free $110,777 death benefit.
The Growth Factor: Because she started planning at 50, she included a 3% compound inflation rider. By the time she is 80, her policy value will have grown to $562,456 and the monthly LTC benefit to $11,204.
The Legacy: If Diane never needs care, her children receive a $110,777 tax-free death benefit. More than she paid in premiums. If she does need care, her $1.4M+ portfolio remains as inheritance for her heirs.
The Double-Win for 50-Year-Olds
For Diane, the insurance isn’t an expense but an asset repositioning.
Her care expense is now transferred to insurance, allowing her to invest her remaining $1.4M more aggressively for growth.
Even in the worst-case LTC scenario, the insurance company writes the checks covering significant expenses. Her children’s legacy is protected.
Our Advice
If your financial planner tells you that you can self-fund, ask him/her to review the current costs of care and the projected costs when you will be 80. Then compare with your financial plan including projections when you will be 80. Will you be comfortable that self-funding is prudent and appropriate for you and meet your financial goals?
A long-term care insurance policy gives you peace of mind. We often hear people say they will self-fund without really understanding the costs. After a few minutes of discussion, we find out that self-fund really means they don’t have a plan after all.
