Intro
Self-funding, or self-insuring, means you plan to pay for care yourself without using other resources, such as insurance or Medicaid.
As a general rule of thumb, many advisors recommend the following benchmarks. If your current net worth, not including home equity, is:
- Under $200k, you might qualify for Medicaid
- Between $200k-$3mm, you should consider LTC insurance
- Over $3mm, you should consider self-funding (read on)
At its core, the decision to self-fund or insure is a bet on uncertainty. Self-funding wagers that the timing, duration, and cost of care will remain manageable. Insurance shifts that wager to a carrier in exchange for a known cost.
This post will help you explore this decision through the lens of numbers, your family, and other considerations.
Remember to use the letters LTC as a guide to achieve these goals: Learn about options, Talk with family, and Create a plan. When you decide to buy LTCi or self-fund, add this to your plan and communicate it with your family.
Post jargon
death benefit: a payout to a beneficiary from a hybrid policy after the insured’s death
hybrid: newer LTCi combining life insurance with LTC benefits
internal rate of return (IRR): tax-free annual return on LTCi premiums if all benefits are used, shown in policy illustrations
leverage: how much more your benefits are compared to premiums paid
LTC: long-term care
LTCi: long-term care insurance
memory care: specialized care for those with memory loss
traditional policy: early LTC insurance referred to as "pure" LTCi
➡️ Explore all the LTC jargon
The wrong way to plan
In online forums about long-term care, you might come across dark humor or extreme "solutions" for aging challenges, like driving off a cliff. 👎
While these comments reflect real fears about aging and care, it’s important to approach the future with thoughtful planning.
Long-term care isn’t end-of-life care (that’s hospice). While you might face challenges like getting out of bed or tying your shoes, you can still enjoy meaningful moments—meeting your great-grandchild, pre-boarding at the airport, or binge-watching Seinfeld reruns.
Medicaid
If your net worth is under $200k, you might qualify for Medicaid. Typically a last-resort option, this public assistance program can help cover LTC costs but is limited to cases of severe financial hardship or disability. Eligibility is based on strict income and asset requirements. Read our post on this option.
Jesse Vickey
Long-term care insurance
If your net worth falls between $200k and $3mm, many advisors recommend considering long-term care insurance.
Can you qualify?
First, consider whether you can qualify for LTC insurance. Many health conditions can make you ineligible. At Long Term What?, you can complete a health pre-screen to receive informal feedback from insurers and get a better sense of your eligibility. Learn more in this post.
Jesse Vickey
Why consider insurance
We cover additional reasons to consider long-term care insurance in a separate post. Below are a few of the key benefits discussed in more detail there:
- Tax advantages: LTC insurance benefits and benefit growth are generally tax-free.
- Immediate leverage: Insurance provides leverage that self-funding cannot. For example, $100k in premiums can translate into $300k to $500k of LTC coverage right away.
- Spousal protection: Without proper planning, long-term care costs can significantly drain savings, potentially leaving a spouse with limited financial resources.
Jesse Vickey
The remainder of this section focuses on how insurance compares directly with self-funding.
Standard of care
Many people considering self-funding maintain an above-average standard of living. They may own higher-value assets, such as a home or car, and enjoy costlier activities, like travel. As a result, they may expect a higher-than-average level of care when needs arise, often exceeding typical LTC cost assumptions. For those who prefer to receive care at home, 24/7 care can cost hundreds of thousands of dollars per year.
Sequence of returns risk
Market downturns can make self-funding care risky. If care is needed during a market slump, you may be forced to sell investments at depressed values, an event often referred to as sequence-of-returns risk. While markets have historically delivered strong returns over long periods of time, the path is uneven and marked by significant downturns along the way.
History offers several examples:
| When | What | How |
|---|---|---|
| 1929-32 | Great Depression | Dow dropped 89% |
| 1987 | Black Monday | Dow dropped 23% |
| 2000-02 | Dotcom bubble | Nasdaq dropped 80% |
| 2008-09 | Global financial crisis | S&P dropped 60% |
| 2020 | COVID-19 pandemic | S&P dropped 34% |
Long-term care insurance can act as a safeguard, helping protect your savings when markets are unstable.
Tax considerations
Self-funding long-term care can be expensive due to taxes, while LTC insurance benefits are typically tax-free.
Below is a simplified illustration showing the approximate cost of paying for $1.00 of long-term care from different sources. Actual results will vary based on individual tax situations and account types.
| Source | Cost of $1 in LTC | Why the cost |
|---|---|---|
| IRA | $1.30 | Income tax |
| Savings | $1.00 | - |
| Investment | $1.15 | Capital gains tax |
| LTCi | $.20-$.40 | Leveraged, tax-free benefits |
For example:
- IRA: You may need to withdraw $1.30, pay roughly $0.30 in taxes, and net $1.00 to cover LTC costs.
- LTC insurance - You might spend about $0.25 to receive $1.00 in tax-free benefits to pay for LTC costs.
This comparison highlights how taxes can significantly increase the true cost of self-funding care, especially when withdrawals coincide with higher-income years.
Pros to self-funding
For some households, self-funding is a deliberate and rational choice. It offers maximum flexibility, full control over assets, and no reliance on underwriting, policy terms, or future insurer payments. For families with substantial, liquid net worth and a high tolerance for uncertainty, self-funding can simplify planning rather than complicate it.
For others, the primary advantage of self-funding is straightforward. If you never need care, you never pay insurance premiums.
That advantage narrowed when hybrid LTC policies entered the market. Originally sold as a form of self-funding, many hybrids refund premiums to heirs if care is never needed, shifting the trade-off away from losing premiums and toward giving up the potential growth those dollars might have earned elsewhere over time.
So when does self-funding truly “win”? Let's dig into the numbers.
Internal rate of return (IRR)
Some hybrid LTC policies illustrate their value by showing the internal rate of return (IRR) if benefits are used. IRR represents the annual, tax-free return on your premium when you fully utilize the policy’s LTC benefits.
For example, consider a healthy 50-year-old male who makes a one-time $100,000 premium payment for a 6-year hybrid policy with 3% compound inflation protection. Below is an illustration of how guaranteed benefits may grow over time.
| Year | Age benefits begin | Total LTC benefit | IRR |
|---|---|---|---|
| 10 | 60 | $830,000 | 18% |
| 20 | 70 | $1,120,000 | 11% |
| 30 | 80 | $1,510,000 | 9% |
In this scenario, beginning benefits at age 80 produces an estimated 9% annual, tax-free return on the original $100,000 premium, a strong return for a guaranteed benefit. If care is never needed, heirs typically receive the premium back, but with a much lower effective return, often closer to 1%.
Self-funding “wins” when you never need care. Hybrid LTC insurance trades some investment growth for protection. If care is needed, the leverage can deliver strong returns. If not, you typically get your premium back with minimal growth.
Middle-of-the-road option
Many high-net-worth individuals choose a middle-of-the-road approach when deciding between self-funding and insurance, aiming to balance coverage with financial flexibility.
In this strategy, they purchase some LTC insurance, but not enough to cover every possible cost. A smaller policy can help offset major expenses, while self-funding the remainder preserves flexibility and control. This approach provides meaningful protection without over-insuring or tying up more capital than necessary.
Wrap up
In the end, both self-funding and insurance involve risk. Self-funding means accepting uncertainty in exchange for flexibility and control. Insurance means paying a known cost to reduce exposure to worst-case outcomes. The right choice is not about avoiding risk altogether, but about deciding which risks you are willing to carry and which ones you prefer to transfer.
If you choose to self-fund, earmark a portion of your assets specifically for long-term care. Keeping a separate bucket for these costs can help you stay prepared. It is also important to let your family know about this plan so everyone is aligned before care is needed.
The key is having a plan that fits your goals and values. Planning is not about predicting what will happen. It is about being ready for whatever life brings.
