Planning to Self-Insure the Risk of Long-Term Care Expenses?

Elder Care

Planning for long-term care expenses should be a part of everyone’s estate plan by the time they reach 50.  Here’s a piece by Alex Townsend, CLTC of Raleigh on why it may not be a good idea to try self-insure:

Things To Consider:
“How much does someone have to be worth to not need long-term care insurance?”
What’s the magic number? How rich is too rich to not need LTC insurance protection? Even though I think that is the wrong question to ask (see next question), my answer is this: If you can write a check each month, indefinitely, for the kind of long-term care that you and your spouse will desire should you have the need, and it doesn’t bother you to write this check, then you may want to pass on LTC insurance.
“I want a number. Exactly how much does someone have to have to not need LTC insurance?”
My answer is a question. How much does someone have to be worth to not need Major Medical or Medicare Supplement or homeowners insurance? The reason I ask these questions is that we don’t think of other types of insurance in terms of whether we have enough money to not need them. Think about it: There are many wealthy people who could afford to rebuild their home if it burned to the ground, and the likelihood of that kind of total loss is minimal. You may want to take this opportunity to review all your insurance with a critical eye applying sound risk management principles. Perhaps LTC coverage is not the only potentially catastrophic cost you should consider self-insuring. Assuming that you believe in the value of insurance and you insure for other large risks, why is long-term care insurance the one insurance that you won’t buy? Financially astute people don’t make the best decisions every time, but they also don’t make big mistakes. Most wealthy people don’t like their money to be vulnerable. If you buy LTC insurance and never use it, you might say you’ve made a small mistake. If you don’t buy LTC insurance and need it, you might say it was a big mistake.
Other Considerations:
Today’s average cost (2007) in a skilled facility in the Piedmont NC area is approximately $190 per day or $70,000 per year. In 25 years, at a time you’re more likely to need care, if costs rise at just 5% annually, the cost will be approximately $700,000 per year. A need of 3 years would mean $2,100,000 total costs. Regardless of how much money you have, you or your family probably won’t be happy about writing those kinds of checks!
The above example assumes just one person needs LTC. What if both spouses need it at the same time? I have clients where this is the case. It can and does happen.
How “liquid” will your assets be at claim time? Which asset will you liquidate first? Will you have to sell an equity that happens to be way down at the time? Will liquidation trigger unwanted capital gains taxes? As you save for the eventuality of needing LTC, what if your health takes an unexpected change for the worse sooner rather than later?
Often, after purchasing a policy, I have had many people tell me that they felt a tremendous sense of freedom, relief, and peace of mind saying things like, “now I can enjoy my money because I have so much more confidence knowing I have a resource in place in case the unthinkable happens”.
Plan…then relax!
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