Many people choose to self-fund their long-term care costs instead of buying insurance.
Here are 10 reasons why long-term care insurance is better than self-funding:
#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 up to per diem limits. In 2021, the per day limit is $400. 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, depending upon your age and 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.
It 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. Your family 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 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. 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 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 down 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 long-term 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 self-funding, even if you have millions of dollars. 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.