Paying for Long-Term Care: Self Funding vs. Insurance
When helping our clients plan for future long-term care needs, one decision they need to make is whether to self-fund care needs using existing retirement funds or purchase long-term care (LTC) insurance. Both options have their merits and drawbacks, and the best choice often depends on individual financial situations, health status, and personal investment strategies.
Investing for long-term care
Advantages:
Flexibility: By setting aside funds specifically for long-term care needs, you maintain control over your investment portfolio and can access these funds as needed without the restrictions that sometimes come with insurance policies.
Potential growth: Investments can grow over time, potentially providing more resources in the future. This growth may outpace the rising costs of long-term care, but has a higher investment risk strategy
Considerations:
Market risk: Investments are subject to market fluctuations, which could affect the value of the funds when you need them most.
Healthcare cost inflation: The cost of long-term care may increase faster than your investment growth, which could leave you underfunded.
Discipline required: Self-funding requires the discipline to consistently allocate funds and manage investments over many years.
Tax implications: Investing for long-term care might not provide specific tax benefits unless the investments are held in tax-advantaged accounts like health savings accounts (HSAs), where funds used for qualifying medical expenses are tax-free.
Long-term care insurance
Advantages:
Certainty and peace of mind: Long-term care insurance offers the certainty of coverage for specific types of care, which can provide peace of mind knowing that you are financially protected against substantial long-term care costs.
Asset protection: Insurance can help protect your savings and other assets from being depleted by the high costs of long-term care.
Leverage: The benefits you will receive are far greater than the allocation of funds should long-term care become required. The investment risk is considerably lower than managing the cost using retirement funds
Considerations:
Product options: Look into both stand-alone and hybrid insurance products. For example, some hybrid life insurance products and some annuities include coverage for long-term care.
Cost: LTC insurance premiums can be expensive, and they may increase over time. This can be particularly challenging for retirees on a fixed income. Some insurers do offer an optional inflation benefit on their LTC policies, which may help in this regard.
Use it or lose it: If you never require long-term care, the premiums paid into the policy provide no financial return, unlike investments that can be used for other purposes or left as part of an estate.
Tax implications: Premiums paid for qualified LTC insurance can be tax-deductible depending on your age and the amount of the premiums relative to your income. Benefits received from long-term care policies generally are not taxed as income.
Combining both approaches
For some, a combination of both investing and insurance might be the best approach. This strategy allows for the growth potential of investments while providing a safety net through insurance. For example, you could purchase a smaller insurance policy to cover a portion of potential long-term care costs and invest to cover the rest. This can balance the risk and costs associated with each option.
Factors to consider in decision making
When we’re having this discussion with our clients, we walk then through several factors that may influence their decision, such as:
- Current health and family history. If you have a family history of chronic illnesses or believe you might be at higher risk of requiring long-term care, insurance might be a more prudent choice.
- Cash flow and financial resources. Evaluate your current and future income sources, such as pensions, Social Security, annuities, and savings, to determine what you can reasonably afford without compromising your lifestyle.
- Risk tolerance. Your comfort level with uncertainty can affect whether you choose the more predictable route of insurance or the potentially higher-reward strategy of investing.
Choosing between self-funding long-term care through investments or purchasing insurance involves a detailed analysis of your financial health, personal circumstances, and risk tolerance. At Longevity Income Solutions, we’ll help you explore all options so you can make an informed decision tailored to your unique needs. Email info@longevityis.com to request further information.