Insurance Insights with Claude Thau



Self-Insuring Your LTC Risk

"Clearly, you’ll never be certain that you can spend that money on yourself, because the older you get, the higher the chances of needing LTC.  You will NEVER know that you did not need LTC."

Self-insuring your long-term care (LTC) risk makes a lot of sense.  At any point in your life, you want to maximize your assets.  To help maximize your assets, you want to minimize expenses.  Insurance premiums are an expense, so it makes sense not to buy insurance if you can afford to pay for LTC yourself.

You probably also think that if you never need LTC, you’d have saved a lot of money by not paying long-term care insurance (LTCi) premiums and could use that money on something else.

So please take 5 seconds to think of three ways you might spend that money if you never need care.  That is, how would you spend the money you saved by not paying LTCi premiums?

Please stop to answer that question…

In answering that question, almost everybody includes spending the money on themselves, such as a cruise, vacation home, etc.  But when will you know that you never needed LTC, so you can spend your money on the cruise?

Clearly, you’ll never be certain that you can spend that money on yourself, because the older you get, the higher the chances of needing LTC.  You will NEVER know that you did not need LTC.

So, if you self-insure and you win (never need LTC), your kids, grandchildren, charities or other heirs would get the money you saved by not buying LTCi.  That’s great!

Now that we presumably agree that the money will go to your heirs, let’s re-visit the question of LTCi.  Most people believe that the first $300,000 they leave to their kids is a bit more important than the second $300,000 and the second $300,000 is a bit more important than the third $300,000, etc. 

Do you agree?  That concept is called the “marginal utility of money”.  That first $300,000 can help the kids buy a house.  The second $300,000 is relatively less critical.

How does that relate to LTCi?  LTCi premiums scrape away some of the last, hence least important, $300,000 slice of your estate, in order to make the first, second and third $300,000 slices more secure. 

Most people like the idea of making the more important part of their financial legacy more secure for their heirs.  If they buy LTCi and never need it, their heirs inherit less money, but if they (and/or their spouse) needs LTC, their heirs might be much better off if LTCi was purchased.

Most people find the above line of reasoning to be compelling, concluding that it would make sense to consider LTCi sometime.  In two months, my article will explore “When is the Best Time to Buy LTCi?”