“Why can’t I just pay for my own long term care?”
I get that question frequently, and the answer is: you can.
Self-insuring, or simply deciding you’ve got enough money on hand to pay for your own long term care needs, is a perfectly acceptable strategy. But, this assumes that you know what you’re getting yourself into, and that you understand what self-insuring means. Let’s talk about a few things that you need to consider before you decide to self-insure.
Most of us know, within a few thousand dollars, how much it would cost us to replace our car, or even our house. That’s a predictable expense, something you can put a fairly accurate price tag on. How much will your long term care services cost you? You can’t say. It might be a few thousand dollars, but it could just as easily be half-a-million dollars. There’s just no way to predict it. That makes it hard to say “Okay, I’ve put aside X amount of dollars; this should cover my long term care needs.” That’s the first problem – will the money you’ve identified as your long term care fund be enough? Most people drastically underestimate how expensive long term care can be.
The second problem is this – are you sure that money’s not going to be needed for anything else, before you need long term care? If you dip into this every time you go on a vacation, or every time you need to buy a new appliance, it’s not going to be there when you need long term care. Your long term care fund has to be used for nothing but long term care, so you need to put it aside and forget it. Again, not always as easy as it sounds.
Finally, what if you have enough money, but it’s not that easy to get to? I’ve had several clients who are very wealthy on paper, but all of their wealth is in real estate. If they needed cash, they’d be hard pressed to get it without either borrowing it or selling a piece of real estate. What if you happen to need it in the middle of a real estate market like the one we’re in now? Uh-oh. What if your money is kept in retirement accounts or investments? You’re going to be taxed on that when you take it out, right? Suddenly, if you’re drawing more than your normal income from these accounts, your taxes are going up. What if your money’s in the market, and the market is down when you need it? Using your own money is often more expensive than the actual care, because of the costs you incur in getting to it.
Self-insuring is a valid approach, but it’s not necessarily an easy or realistic one. Insurance provides you with leverage and access – you turn your relatively small premium into a much, much larger benefit that will be there when you need it. If you’re going to self-insure, make sure you know what you’re up against. Thanks!
And Happy New Year! Kerry Peabody, LTC insurance specialist, Clark Insurance