A reader writes in, asking:
“As I’ve read about the issues with LTC insurance, one of the topics that consistently pops up is self insuring. I understand the concept of self-insurance, but what I don’t get is how to go about doing it. How would you go about setting up a self insuring plan? How big should the payments be? Where should the money be kept? Should it be invested?”
As a bit of background for those not familiar with the term, to “self-insure” against a certain risk means to save money to be able to pay for the expense out of pocket rather than to buy insurance to cover the expense.
How, exactly, to go about self-insuring for long-term care costs is not something I’ve seen addressed by any authoritative source. What follows are my thoughts on the matter, but I’m very interested to hear what other readers think.
How Much to Save?
As far as the size of the “payments” (which would really just be additional savings contributions), I think a reasonable place to start the assessment would be with an amount equal to the premium you’d have to pay for a new LTC insurance policy. From there, however, you would need to adjust the amount upward to account for the fact that when you’re self-insuring, you don’t get to take advantage of risk pooling.
That is, to self-insure for long-term care, you would have to save as if you will need to pay for long-term care. In comparison, when using insurance, the cost is spread out among multiple people so that the premiums — after paying the insurance company’s operating expenses and profits — only have to cover the average cost per person after accounting for the fact that many people will not end up needing LTC.
Note: This is the reason why the conventional wisdom (which I think is on-target) is that people should buy a long-term care policy sometime between age 50 and 65 if they:
- Can afford the premiums, but
- Cannot afford to pay for an extended long-term care need out of pocket (at an average rate of $3,300 per month for an assisted living facility or $6,100 per month for a semi-private room at a nursing home).
Alternatively, you can approach the question from the opposite direction: Look up the average annual cost for nursing home care in your state, then create a savings plan so that you’re confident you’ll have enough saved for a few years of nursing home care by the time you reach retirement age. (Note: The fact that most people cannot manage such a level of savings is why LTC insurance makes sense for many people.)
Where Should You Keep the Money?
As far as where the money should be kept, I’m inclined to say that I’d put the additional savings in retirement accounts (if you have room) — with my reasoning being that:
- In the event you don’t end up needing long-term care, it will generally be better to have funded your retirement accounts than to have saved in a taxable account.
- There’s a high probability that if you do end up needing long-term care, it won’t be until after age 59.5. (Approximately 90% of long-term care insurance claims start when the policyholder is 70 or older.)
How Should You Invest the Money?
As far as how the money should be invested, I would probably invest it similarly to any other retirement savings during most of one’s working years. However, as you approach retirement age, I’d be inclined to move the money to something more conservative than a typical retirement portfolio — reason being that LTC expenses (while still “long-term”) are likely to cover a much shorter period of time than retirement. And there’s no way to know when they’ll start.
But again, I haven’t read anything authoritative on this topic, and I’m eager to hear what other readers think.
Editorial note: Thanks to my dad, Pat Heffern of AGIS Network, for providing relevant pieces of data for this article. (For those interested, their website has lots of eldercare and long-term care-related information.)