Planning for retirement, buying Insurance or self-insure?

Long Term Care Insurance

Long Term Care Insurance

For younger people who are interested in planning for their old age, one of the big questions is how to deal with potential long term care requirements? It is entirely possible that you may require hospitalization or a home nurse when you are older and both of those prospects can be extremely expensive.

You can rely on long term care insurance, but there is always the risk that your claim may be denied. The other option is to self-insure, which involves building up a pool of funds over your lifetime to help cover those unexpected costs.

Some financial analysts suggest that instead of putting money into long-term-care premiums and you could invest the money in a low cost 60/40 balanced index fund, which creates that pool of funds for later in life.

Since insurance is all about calculating risk, what does this self-insured scenario look like? The chance that an individual who lives to 65 will need no long term care before dying is about one in three. One in five seniors will need long term care for five years or more, so that is the two ends of the spectrum.

Then you have to look at home health care costs versus nursing home care. A nursing home will cost between $70’000-90’000 per year while in home care is closer to $30’000. If you have a good relationship with your family, you would be more likely to have a good home environment to spend your old age in so that should also be considered.

A young person in their 30s can buy a long term policy for about $60 a month, which provides $200 per day in care costs. Now what would we end up with if we invested the $60 instead? A life long mutual fund that is split at 60/40 stocks to bonds would return anywhere between 6-8%. Yo will have about $220’000 in that account by the age 85. That amount of money could pay for perhaps 2-3 years of nursing home care or 7-8 years of in home care.

Additionally that $60 a month insurance premium would continue to rise in cost, so you would have to consider that the lump sum from investing the same amount in an investment account may be closer to $300’000. Some insurance companies also go broke! What happens when the Insurance company you have been investing in goes belly up before you receive your long term care, all of those premiums will be meaningless.

Additionally, your relatives get to keep any of the unused money from a long term health fund that you have set up. That might give them more incentive to keep you in their home instead of in an expensive nursing home. On first glance it seems that someone in their 30s would be best off building their own long term care fund.

However there are a few issues. You would have to continue adding to that account your entire life, without fail. What happens if you lose your job for a couple of years? You might be forced to dip into the fund and when it’s not building, risk is increasing. What if you decide to dip into it to pay for your children’s college? It takes discipline to save for decades.

Long term care costs could increase rapidly as well, so that fund may not cover much into the future. An insurance policy will adjust it’s payout total upwards as costs rise, but of course so will premiums. Insurance covers the cost of inflation, the self-insured person bares the cost of inflation against their savings.

There is also the small possibility that you will need longer term care, so what happens if you burn through your fund and have to rely upon your children? It could be very expensive for them and damage their future finances.

The last risk is that you may need long term care at a much younger age than expected. What if you have a serious illness that forces you to retire at age 50? You self-insured fund won’t be big enough yet to cover you for an extended period.

When all factors are considered, both self insurance and long term care insurance have negative and positive aspects. If you want to reduce risk, take a closer look at your finances, health, lifestyle and family. If you are well off financially, can commit to saving, and can see yourself living in a big house with loving children who can help care for you in your old age, there is less risk with self-insurance.

However if you think you won’t have the family network to help support you, or you are concerned about your health in old age, then insurance may be a better option. Either way it’s a difficult decision, but with some thought you can reduce risk and find the right solution for yourself.