Should I Self-Insure Long Term Health Care Costs?

Many financial planners – as well as investment advisors – recommend that individuals worth north
of $1,500,000 should “self-insure” the long term health care risk because they don’t “need” it.  The reason:  They have “enough” money to pay for it.

Let’s look at the three key words in this recommendation: 

1. “Self-Insure”
2. “Need”
3. “Enough”

Self Insure

Self-insurance is a risk management technique used by many large institutions and it involves quantifying the hazard and then setting aside reserves to pay the potential costs of it.  This process, of course, is rarely used by individuals who have been told to “self-insure” long term care costs and, instead, it simply becomes an excuse to completely ignore the issue (it’s also a guaranteed put down to insurance agents).  

Need

The logical extension of the “you don’t need long term care insurance” means that affluent individuals should also cancel their liability insurance, their property insurance, their disability insurance, and their health insurance because they don’t “need” those coverages either.  The fact of the matter is the affluent don’t buy insurance because they need it, they buy insurance because it is prudent to do so.  For example, an individual may have enough liquid assets to rebuild his $700,000 house if it burns to the ground, but why should he want to take that risk when he can transfer it to an insurance company for a couple of thousand dollars a year?  And the same can be said for the liability risk, the disability risk, the health risk, and even the death risk. 

Enough

When advisors tell their clients they don’t need long term care insurance because they have “enough” money to pay for it, what are they really saying?  Here are some possibilities: 

• “You have $2,000,000 in your investment account so if you run through a million dollars to pay your spouse’s Alzheimer’s bills there will still be $1,000,000 left – assuming we don’t have to liquidate any assets at a profit in which case you’ll have to pay some capital gains taxes.”
   
• “You have $2,000,000 in your profit sharing account so if you run through a million dollars paying your spouse’s Parkinson’s bills there will still be $333,333 left in it (distributions from qualified plans are 100% taxable as ordinary income).”
   
• “Don’t worry about deciding how much money is ‘enough’ for your family; I’ll make that decision for you.”
   
• “If you or your wife – or both of you – actually need long term health care, it may turn out that you don’t have ‘enough’ to pay for care costs and still remain financially secure.  But not to worry, should that occur I’ll pay your long term care health care costs for you.”

Here are the realities behind the advisor recommendation of you not needing long term care insurance because you have “enough”: 

• Advisors are not qualified to tell you how much of your money is “enough” money – that is a personal judgment call.
• Advisors usually do not think about the financial or tax consequences of liquidating assets to pay care costs.
• Advisors usually do not think about the emotional consequences of having to deal with an incurable illness and watching your assets being sold off to pay for it.
• Advisors are not going to pay your long term health care costs if you incur them – even if they had recommended against the purchase of long term care insurance.
• Advisors, in general, are not aware of new long term care insurance solutions, the tax subsidies that are often available to pay for them, and the fact that premiums can be refunded if the insurance policy is never used. 

If you have heard these common words from your advisor please take another look as to whether your family’s financial security will be impacted by the costs of extended health care. Take 3 minutes to dial our toll-free, automated phone line to determine the impact of long term care costs on YOUR income and assets:

DIAL (877) 503-9665 or click here to have our automated system call you.

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