Many people choose to self-fund their extended care costs instead of buying insurance.
Here are 10 reasons why long-term care (LTC) insurance is better than 100% self-funding all of your care:
#1 – Leverage
Self-funding or using your own money to pay for extended care is less efficient versus having a policy. When you have an insurance policy, you leverage your money so that each dollar that you put into the plan, you will get a multiple of dollars back and even up to an unlimited amount if you buy a lifetime benefit. Most often, these benefits come out tax-free should you need the long-term care (LTC).
A policy isn’t the plan, rather it pays for the plan.
# 2– Tax consequences
There can be tax consequences if you self-fund your care costs. Assets do NOT pay for care; income does, which means you need to convert those assets to income. If you need to pull money out of an IRA or 401k, that money counts towards your adjusted gross income, which increases your tax rate, which increases your Medicare costs. If you need to sell real estate investments or stocks, you’ll likely pay capital gains tax.
# 3– Tax advantages
There are tax advantages if you have a policy. Benefits are received tax-free for reimbursement policies. If it’s a cash indemnity policy, there are “per diem”/per day limits. In 2024, the per day limit is $410. However, if your actual expenses paid for care are greater than the limits, then it would all be tax-free. You also may be able to deduct a portion or all of your premiums as a medical expense. This will depend on your age, if you itemize deductions, use a Health Savings Account (HSA) to pay premiums, or depending on the type of business structure, if you are a business owner.
# 4– Predictability
A policy brings predictability to an unpredictable situation. We don’t know if and when we’ll need care or for how long, BUT we buy insurance for the guarantee! If we need the care, we’ll know exactly how much tax-free income we’ll have coming in to help pay for care. Plus, we’ll have professional services to help our family.
LTC insurance makes an unmanageable situation manageable.
# 5– Professional Services
If you need extended care, someone will need to organize and make decisions for you. That burden usually falls on your family, whether that be your spouse, kids, extended family or a close friend. They will need help navigating the situation. That’s where the care coordinators, case managers, and claims specialists come in. These professionals can guide your family through the whole process. This is often an overlooked benefit, but extremely valuable!
#6 – Other benefits
Most policies also include home modifications, caregiver training, respite care, and bed reservation. All of these things you would be responsible for if you completely self-funded your care.
# 7– Other consequences
A policy protects your family from the financial, physical, mental, and emotional consequences that occur in an extended care situation. You’ll have the tax-free money coming in to help pay for care which mitigates the financial consequences. This can allow you to have your care provided by a professional and not a family member which mitigates the physical consequences to your family. They won’t have to sacrifice their physical health to give you the care you need and deserve. It will also relieve stress and emotional consequences that often occur.
# 8 – Control
A plan helps you can stay in control of your care options, so you don’t have to depend on the government. Medicaid pays for care if you have low income and have spent down almost all your assets. Medicaid applicants are also subject to a 5-year look back period. Having an insurance policy allows you to choose what kind of care you want and where you want to receive it; whether that be in your home or in a community or facility.
# 9 – Legacy
With a policy, you can leave a legacy to your heirs. Would you rather spend down your estate OR be able to pass it along to your family?
# 10 – Dedicated Funds
A policy helps protect what you’ve worked so hard for because it gives you a dedicated source of funds for extended care so that all your other funds aren’t at risk. This can free you and your financial advisor up to be able to invest in ways that maybe otherwise you wouldn’t have.
The Bottom Line
There are so many reasons why an LTC insurance policy is valuable and better than 100% self-funding, even if you have millions of dollars. Most people that buy LTC insurance still self-fund a portion of their care. They rely on their policy as their foundation or base to pay for care and anything above what their policy doesn’t cover, they will self-fund. This “co-funding” approach provides meaningful and affordable coverage. An analogy we like to use about self-funding and co-funding with LTC insurance is if there’s a Spring storm coming. If you have all the windows of the house open because it’s a beautiful Spring day and then out of nowhere a bad storm comes through. Wouldn’t you close as many windows as you could so rain doesn’t come in the house? The idea of 100% self-funding is leaving all the windows open. You’re leaving yourself exposed to the elements and damage. Now, if you’re able to close at least some or most of the windows before the storm comes, then you’ll be better protected. Closing as many windows as you can before the storm comes is the idea of co-funding (using LTC insurance and self-funding a portion of your care). A policy will give you peace of mind knowing that you and your family are well protected and can reduce the physical, mental, emotional, and financial consequences of an LTC event.