To Self-Insure or Not
Is self-insuring a wise investment?
Some may believe they can afford to self-insure. But even those with significant assets could erode their savings very quickly should they need long term care.
The first concern should be whether or not you will be insurable in the future if you should decide later to buy insurance. Insurability is determined by: application information, phone interview, and medical records review. Not every applicant qualifies.
If you have decided to self-insure it is recommended that you work with an estate and elder law attorney to make sure your assets are protected. More people are worried that the IRS will take a big chunk out of their estate than what they might pay for long term care.
Using Your Investments/Savings To Pay For Care
How much principal would you need to generate $6,000-$9,000 a month for care?
For every $1,000 of monthly retirement income you want to generate from your own savings, you will need about $230,000 in assets, according to the Schwab Center for Investment Research. For example, if you want $3,000 a month, or $36,000 a year, you would need savings of $690,000. That's a conservative estimate, assuming that you earn 5.2% on your investments and live off the earnings without dipping into the principal.
Got a pencil and calculator?
The average nursing home stay is 2.5 years (excludes home, assisted living, memory care).
The average nursing home cost Nationwide in 2016:
- Semi-Private Room $6,844/month x 12 = $82,128/year
- Semi-Private Room $7,698/month x 12 = $92,376/year
The cost of nursing home care varies by location. In New York City the cost is $163,000/year and Athens GA it is $66,000/year. To find the average cost for your area you can call local care providers (http://www.NewLifeStyles.com).
Just consider the following example. If you save $1,500 per year and obtains a 7% rate of return annually over 30 years, that money grows to just $142,000. But if you were to buy a long term care policy that also costs $1,500 per year the policy benefit maximum could grow to $889,000.14 with 5% compound inflation protection.
Key reasons to consider long-term care insurance, advice from Schwab Investments
- Long-term care insurance can provide security for years to come by helping to:
- Secure quality, affordable care
- Preserve independence and financial freedom
- Help provide for the rising cost of long-term care
- Relieve family members and friends from having to provide care
- Safeguard your assets for your spouse and other heirs
- Help pay for expenses not covered by Medicare and Medigap
Do You Know If Are You Protecting Your Retirement?
Most long term care funds come from life savings or retirement savings.
Can you think of anything other than the cost of long term care that could deplete your lifetime savings, retirement income, or portfolio?
If you needed long term care tomorrow, what would be the consequences to those around you?
In that situation it is the consequences that matter, not the money. Once someone needs care money no longer becomes an issue. Once someone needs care no amount of money can buy insurance. Their decision to self-insure will prove to be right or wrong.
Are you thinking about investing the premium instead?
After 21 years of saving, based on the national average, you have accumulated approximately enough money to pay for about 12 months of care.
If you were faced with the average 30 month stay based only on National Average, even under the optimal saving conditions shown above, you would have $123,192 of risk exposure. Every year in addition to the average will cost you an additional $82,128.00/Per Year.
What if you are one of the rare cases that needs care for five or six years? Some cases of dementia and Alzheimer's have been in care for eight years. The question is why would you risk so much ($100,000-$600,000) for such a small expense in comparison with insurance?
Some People Just Dislike Use-It-Or-Lose It Insurance
For those who worry that they may die before they use their long term care insurance there are alternatives to use-it-or-lose-it long term care insurance. The only insurance that is guaranteed to pay is life insurance because it's the only event that is guaranteed to happen.
The life insurance with a LTC rider is great for those who have an old cash-value whole or universal life policy, you use the 1035 tax-free exchange to transfer the cash value to a life insurance policy that has LTC benefits. You will not have to pay capital gains - Pension Protection Act. If you are over 59 1/2 years old in most states you can use qualified money (IRA/401k) to fund your life insurance with LTC. This might appeal those who have large retirement accounts and do not need the income. The policy will cover the RMD. See LifeLTC
The life insurance with long term care benefits do not qualify for the state Partnership asset protection program, only traditional long term care insurance qualifies. See Partnership