Self-Insuring for Long-Term Care? Consider This.
by Claude Thau
Many people think they can cover the cost of long-term care, and they may be right, even at prices of up to $6,000 a month.
If they self-insure instead of buying long-term care insurance, and they never need care, they could use that money for something else.
If you self-insure, how much should you be prepared to spend? Despite being an actuary, I can’t predict how much you’ll need for your care or your spouse’s. Results vary widely. However, it is clear that affluent people spend more on long-term care than
less-affluent people. One reason: They live longer, so they need more of it. And the setting matters, too: It’s more expensive for a private suite at the Ritz than a shared room at Motel 6.
Personal example: My mother-in-law has been in a facility for 13 years. That may be unlikely to happen to you or your spouse, but it can happen, with costs easily in the hundreds of thousands of dollars, and potentially seven figures.
Insurance companies hold much less money for you because they can rely on the law of averages and long-term care is “use-it-or-lose-it” insurance. Insurers take money they set aside for people who need little or no care and use it for those who need a lot. That allows you to create a huge pool of protection for pennies on the dollar. You and your spouse would recover all of your combined premiums, plus after-tax investment income you might have earned, if one of you collects maximum benefits for as little as nine months.
Thus, long-term care insurance is much more efficient than self-insurance, converting what is likely your most volatile future expense into a fixed cost.
Many people readily agree that such insurance is more efficient, but are bothered by its “use it or lose it” nature. Please: Pause here to name a few things you might do with the money you would have spent on insurance if you never need long-term care.
Many people say they would leave more money to their heirs. Long-term care insurance increases the likelihood that your heirs will get an attractive inheritance because it protects against the most likely major risk to inheritance. Other say they would travel, but if large amounts are spent on travel, will there be enough to pay for needed care?
Long-term insurance reduces your need to hold rainy-day funds, allowing you to gift money to your children, grandchildren and charities while still alive. And, yes, it allows you to spend more money on travel or other pleasures. Ironically, the very reasons you might be disinclined to buy long-term care insurance can turn out to be good reasons to buy it.
Furthermore, human nature may interfere with the success of self-insuring. Many people who plan to self-insure, and develop a lot more assets than they anticipated, refuse to spend their money when their need arises. Why? Reason No. 1: We fear out-living their assets. Second, we don’t want to spend “the kids’ inheritance.” We think our grandchildren have much better use for the money. Third, our sense of the value of a dollar does not keep up with the times. People needing care today often think the $25-an-hour expense is not worth more than $5 an hour. We can laugh, but when it gets to be our turn, we won’t like the cost, either. For these reasons, people who self-insure often end up choosing to “do without”.
One way to do without is to move in with “the children.” People who don’t have long-term care insurance are 50 percent more likely to do so. Family can’t be at Grandma’s home continuously and she doesn’t want to move to a nursing home and is either unable or unwilling to pay for care providers to come to her home. So she moves in with her daughter, thinking that either her daughter or son-in-law could help or if they aren’t home, perhaps one of their children could help.
Long-term care insurance permits a care recipient to maintain the dignity, independence and comfort of living in her own home, while not disrupting her children’s family. The best care blends family care and commercial care. That’s important, because primary caregivers bear a tremendous psychological burden. While 15 percent of our seniors are clinically depressed, 40 percent of those who are caregivers are clinically depressed. And younger generation primary caregivers are more lik-ely—67 percent—to be clinically depressed.
One-third of caregivers report needing more acute health care themselves, and they are more likely to eventually need long-term care, as well, because caregiving wears them down mentally and physically. As a group, they die sooner than non-caregivers.
Primary caregivers get the short end of a lot of straws. We need to ease their burden. In many ways, then, long-term care insurance may have significant value for both you and your caregivers. 
Claude Thau is Director of Strategy and Tactics for Target Insurance Services in Overland Park, Kan.
P | 913.403.5824
E | claudet@targetins.com