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Q&A: "If You Wanted to 'Self-Insure' for Long Term Care, How Much Would You Need to Save?"

Insurance Long Term Care

Question: 

If you wanted to "self-insure" for long term care, how much would you need to save?

Answer:

The answer to that question is unique to you. But here are a few questions and resources to help guide your thinking.... 

Are you in good health? Any issues in your health history that are likely to cause you to need long term care in the future? Understand that good health is no guarantee you won't need future long term care. Sometimes the heart attack or stroke doesn't kill the strongest folks, it just incapacitates them.

Is there a history in your family background of conditions that could lead to a need for long term care? (i.e. stroke, Alzheimer's, other dementia, condition affecting mobility) 

If you needed long term care but had the choice, would you have care brought into your home instead of going to assisted living or nursing home care? Costs can vary significantly depending on the type and amount of care needed.

Are you male or female? For people needing nursing home care, the average length of stay (2008 data) for men is 2.3 years and 2.6 years for women. That's just nursing home...there's no data on whether they first had home care or assisted living, or went straight into nursing care. And note that those are just the averages, which means half of the people needed longer care and half needed less. 

Where do you live? Long term care costs vary significantly by geographic region. Here's a link to LongTermCare.gov's site on Costs of Care in Your State. 

Let's use a simple example...this is just one approach....

I'm a male living in Oregon and let's say I think a reasonable estimate of future care that I might need is three years total. And though I'd want care in my home if possible, let's say I want to have sufficient funds to cover nursing home care if that's what I ended up needing. 

It currently costs about $7,400 per month for a semi-private room in a Portland-area nursing home. Multiply that by 36 months and you get $266,400. But that's in today's dollars (2012 data). So if I need that to pay-out in 30 years or so, add an inflation factor of 5% per year (for example), then I'd need to accumulate a self-insured pool of around $1,150,000 (future dollars).

Take a look at the Costs of Care link for your state and run the numbers. And then ask yourself if that's a risk you can self-insure. 

Remember too, though, while long term care insurance (LTCI) salespeople will often try to sell you a policy that fully covers a future need, this is not a binary decision. It's not buy insurance or self-insure. You can do a bit of both...buy some LTCI to partially cover and partially self-insure. And that may be a better approach to managing your risks while not tying up so much of your capital.

And as an alternative to traditional LTCI, you may wish to educate yourself on "hybrid" policies. These are policies where the long term care coverage is built onto the chassis of a permanent life insurance policy or an annuity. Here's a link to an August 2010 blog post I wrote on these "hybrids": Have Your Cake and Eat it Too, Sort Of 

Hope that helps. All the best!