Self-Funding for Long-Term Care? You Might Want to Reconsider

Enjoying Retirement

Many financially comfortable people object to the idea of purchasing long-term care insurance by pointing out that they can simply self-insure the event. The difficulty with this reasoning, in my opinion, is that it is not often well thought out. There are unforeseen circumstances that can create grave consequences for the family having to suffer through a “self-funded” extended care situation.

During working years, most people live on income from salaries, not their assets. In retirement, the assets that have been accumulated during working years will often be called upon to generate income. We can argue that drawing down an IRA is technically “living on assets”, but that is not how most people and their advisors view it. Look at what can happen if we adopt the approach that we can draw down assets to provide income:

$1,000,000 now becomes $50,000/year; $1,500,000 now becomes $75,000/year, $2,000,000 now becomes $100,000/year; $3,000,000 now becomes $150,000/year

That would assume three unlikely factors:

  1. The assets are returning 5% or more consistently;
  2. 100% of the portfolio is dedicated to generating income;
  3. No taxes are deducted.

Ask a typical 65-year-old what side of the above ledger he plans on using for retirement: the principal, or the income generated by the principal? Since, in this example, most if not all of the income is committed to life­style (which, again, is usually little more than keeping financial commitments), the question now becomes: “How can a person keep their financial commitments and pay for long-term care at the same time?”

The factors that will affect a “self-funding” mentality can be devastating:

  • Liquidity:  Can he/she raise enough cash to pay for care, and if so, would assets have to be sold at a loss?
  • Taxes:  Liquidating qualified funds or low-cost-based assets can create un­necessary and potentially serious tax consequences.
  • Market Conditions:  Paying for care could end up actualizing a loss.
  • Lost Investment Opportunity:  Being told that paying for long-term care insurance would be a lost investment opportunity, can actually create the problem of having a loss because assets now have to be used to pay for care.
  • Legacy Assets:  Would family property have to be sold, or would the opposite occur… could it continue to be supported?
  • “Death Spiral”:  Liquidating assets that have been allocated to generate income creates unnecessary tax consequences, which leads to less income, which then likely leads to more assets having to be liquidated, which still then leads to more tax liabilities, which again leads to less income and so on, never ending till the money is gone!

These issues become even more acute if the client has less than $3 million, because it is even more likely that all of the income generated will be committed to lifestyle. Then there are these rarely mentioned, but extremely important, issues:

  • Who will provide care?
  • Where will it be provided?
  • How will it be coordinated?

Some may argue that they have the money to address these essential concerns. They should be reminded, however, that if care is ever needed, it’s because they would have a physical or cognitive impairment. These concerns will have to be dealt with by their spouse (if there is one) who may be frail themselves, or more likely, by a child or children, forcing them to place their lives on hold. This is exactly what people that love their families want to avoid in the first place. Almost every LTCi product has an invaluable “care coordination system” built into the policy that will allow a care professional to assist the family for free in looking for the best health care agencies in the area, or for an assisted living or nursing home facility. This takes care of a lot of the “leg work” that family and friends would have to normally do. They will also help with paperwork and the collection and submission of receipts. 

About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at   1-800-651-1953 or KMcDonald@Pivot.com.