According to conventional financial planning, it’s prudent for high-net-worth individuals to self-insure for long-term care expenses. While we would agree that there's some truth to this idea, most clients (including high-net-worth ones) should consider transferring the risk of long-term care. Still, that's not to say it's right for every high-net-worth client.
The question, then, is how can you determine if it's the right choice for you?
To guide you through this decision-making process, consider the following five steps.
1) Don’t Rely on Assumptions
Faulty assumptions can cause a lot of harm. We may assume that anyone with $1 million in assets (or $2 million, $3 million, and so on) should self-insure for long-term care , or some may assume that they have more than enough assets to self-insure, without understanding the true cost of a long-term care event. If you don't check these assumptions, you may end up taking losses that can't be recouped.
2) Assess Income over Net Worth
Many individuals use income to pay for long-term care expenses, so determining whether to self-insure should be a question of liquidity, not solvency. Although it might seem intuitive to use net worth as a gauge for your ability to self-insure, income is actually the more accurate indicator.
Now, you may be thinking, can't I use assets from my portfolio to pay for long-term care? Indeed, you can. Liquidating assets can be quite expensive, though, and it can jeopardize your overall financial planning strategies.
As household income is drained to pay for long-term care expenses, you may decide to reallocate liquid assets (e.g., brokerage and retirement accounts) to pay for monthly budget needs. Of course, these transactions will have consequences, including tax ramifications and penalties. Plus, without these assets to drive it, your future retirement income could take a hit as well.
You should also consider the challenges of converting illiquid assets, such as real estate, into liquid assets. It may not be possible to liquidate these assets, or they may take a substantial loss on the sale or face tax consequences.
3) Setting Realistic Income Needs
Costs for long-term care vary depending on the geographic area and the level of care needed. In Maryland, the average monthly nursing home bill is more than $9,000, and care can easily exceed $10,000 per month. Let's look at an example to help illustrate this point.
Bob has a monthly retirement income of $16,000. This income supports his and his spouse's lifestyle, including their home, activities with family and grandchildren, hobbies, and charities. If Bob needs long-term care services at a cost of $10,000 per month, only $6,000 remains to support the spouse's lifestyle.
Bob cannot spend an additional $10,000 per month—perhaps indefinitely—and still meet all his other financial obligations. As such, he should consider other sources of long-term care funding, such as a long-term care insurance policy, to cover part of the future costs.
4) Legacy Plan Impact
Most high-net-worth individuals have a legacy plan, which dictates where they want their money to go after they die. If they self-insure for long-term care expenses, the legacy plan will undoubtedly be affected. Monies they planned for family members or charities will now go to the health care system. Is this a desirable scenario for your family?
5) The Alternatives
Some high-net-worth individuals may decide that self-insuring isn't for them. If this is the case, it's time to evaluate the other options.
Traditional long-term care insurance (LTCI).
Traditional LTCI can be structured in one of two ways: to take all of the risk off the table (with lifetime coverage) or to eliminate some of the risk (e.g., with a five- or six-year plan).
Life insurance policy with a long-term care rider or Accelerated Death Benefit Riders.
For those who want to self-insure for long-term care but don't want to reposition a large sum of assets, life insurance is a good alternative. A life insurance policy allows for annual premiums rather than single premiums. Plus, because the policy is underwritten, the death benefits tend to exceed those from linked-benefit products.
Linked-benefit products.
These products combine the features of LTCI and universal life insurance, making them attractive for those who are concerned about paying premiums and then never needing long-term care. By repositioning an existing asset, they can leverage that money for long-term care benefits, a death benefit if long-term care is never needed, or both. The policyholder maintains control of the assets, freeing up retirement assets for other uses.
Here's an example of how this might work:
Nicole is a high-net-worth individual. She's 65 and married, and she previously declined LTCI because she feels that she has enough money to self-insure, including $200,000 in CDs that she calls her "emergency long-term care fund." We know, of course, that if she ever needs long-term care, this $200,000 won't go far, and she may have to make up the shortfall with other assets.
Here is what Nicole could gain if she repositions $100,000 to purchase a linked-benefit policy:
- A death benefit of $180,000 (income tax-free)
- A total long-term care fund of $540,000 (leveraging her $100,000 more than fivefold)
- A monthly long-term care benefit of $7,500 (which would last for a minimum of 72 months)
- A residual death benefit of $18,000 if she uses her entire long-term care fund
Care coordinators.
Many persons who need care prefer to stay in their homes, but there are many challenges that come with setting up home care. Both traditional LTCI and linked-benefit insurance provide policyholders with care coordinators who can help facilitate this transition. These coordinators offer a very high-level concierge service, which can make a difficult time a little less stressful.
Sound Financial Planning
LTCI not only protects assets but also provides income to pay for care, allowing your financial portfolios to continue supporting family lifestyle and obligations—and keeping retirement plans on track. Some people call LTCI liquidity insurance. We prefer to think of it as sound financial planning.