For retired clients looking to conserve their assets while still protecting themselves against the costs of a medical crisis, long-term care insurance isn’t always the best option. A significant swath of these clients may be better off self-insuring.
Though every situation is different, “Our basic rule of thumb has been that clients with more than $2.5 million in investable assets, including the value of a downsized home, may want to self-insure rather than buy long-term care insurance,” says Dennis Stearns, a Greensboro, N.C.-based financial planner, in the September issue of On Wall Street.
This rule of thumb works in areas with lower long-term care costs like North Carolina, he notes, but not in more expensive cities like New York or Los Angeles, where the cost of care may be double.
Michele Clark, a fee-only financial planner based in Chesterfield, Mo., a suburb of St. Louis, tends to agree. She says clients with around than $2 million in assets and a modest lifestyle may be better off investing their premium dollars and self-insuring. This lets them save on the premium and avoid over-spending on a long-term care policy that they may make only limited use of or possibly never need at all.
The cost of private care in Missouri is about $56,000 a year, Clark says. That compares with around $75,000 in North Carolina and $120,000 in New York.
For retirees with smaller savings who can’t afford to self-insure, but who still want to avoid Medicaid to protect the assets that they do have, Clark suggests a hybrid strategy: Don’t insure for the full cost of care, which may be very expensive and provide more coverage than is necessary. Instead, purchase enough coverage to defray the cost and self-insure for the rest. The majority of her clients take this approach, she says.
To protect her clients against rate hikes, Clark factors a 6% annual inflation rate for the long-term care policy premium into the client’s plan. In reality, increases don’t occur that often, she says, but when they do they can be severe.
Another advantage to purchasing even a minimal amount of long-term care coverage, even for as little as $50 or $100 a day, Clark says, is that “it sends a signal to your family that you were preparing for this and are okay with someone else caring for you.” That’s important, she says, because it eases the family’s emotional stress as well as the financial burden.
“You’re insuring to protect your family,” she says. “Financially, but also their peace of mind.”