Each of us must make the decision either to self-insure for our long-term care or get long-term care insurance. Periodically, insurance salespeople have set up billboards suggesting that if your financial advisor does not recommend long-term care insurance you should sue them. However, we are not fans of long-term care insurance.

In the fantasy of long-term care insurance, for a small premium now you can insure against high medical costs later. In reality, long-term care insurance policy premiums are usually subject to a “limited right to change premium provisions” which enables providers to reprice the insurance in their favor after the fact. Furthermore, long-term care insurance only covers a limited list of health events and for a minimal amount of time. Policies are sold based on purposefully misleading statistics and last as little as 3.1 years despite being called “long-term.”

I suppose that if long-term care was your only worry in the world, then long-term care insurance might be the best answer. However, there are multiple worries in life. Will you have enough money for prescription drugs? For medical care that isn’t long-term care? For funeral expenses? If you live over age 100? If you want to travel more? If your children need financial help? If you want to own a boat?

Invested savings is the most flexible insurance, able to cover the needs and fears for which no other insurance exists.

In general, if you can self-insure, you will likely be better off.

Updates to Our “How to Self-Insure” Advice

Salespeople of long-term care insurance (sometimes abbreviated LTC or LTCI) will tell you the percentage of people who will need long-term care. They notably do not tell you how much care those people end up needing. It turns out that the average end-of-life health care event lasts 6 months when you are 85 years old. This means requiring medical housing or regular care, like in-home care or a nursing home, for 6 months.

In 2020, we recommended:

With 90% of people requiring 3 or less years of nursing home care, budgeting like you need three years of nursing home care should help ensure that you have sufficient money to self-insure your long-term care.

At an average annual cost of $75,000, three years of care would cost $225,000.

Since that recommendation, we discovered Genworth’s Cost of Care study. Each year since 2004, Genworth has surveyed medical providers to gather a database of average regional costs for common long-term care expenses. This means that you can look up how much long-term care services may cost specifically in the area where you will want care.

Statistically speaking, 60% of people never need nursing care. Of the remaining 40%, 18% stay less than 1 year, 12% stay 1-3 years, and 10% stay more than 3 years.

For this reason, if you want to self-insure, we recommend saving 3.1 years of the annual cost of a semi-private room for your area by age 85.

Requiring nursing home care is one of the more expensive end-of-life medical events. The median annual cost of nursing home care in a semi-private room in the U.S. is $93,072. Annual costs here in Charlottesville, Virginia are slightly less at $80,665 for a semi-private room. On the other hand, for individuals in Long Island, New York those costs are as high as $149,650 per year.

How to Self-Insure for Long-Term Care

Most retirement software runs hundreds of possible retirement scenarios, called a Monte Carlo analysis. Success is defined as achieving 80% or more of investment outcomes where blindly following your planned strategy means staying solvent until you die. Keeping an 80% success rate ensures that your average result is much higher than depleting your portfolio. You are prepared to deplete the portfolio, but over half the time you will leave a significant legacy.

With 90% of people requiring 3 or less years of nursing home care, budgeting as though you will need three years of nursing home care should help ensure that you will have sufficient money set aside to self-insure your long-term care. It isn’t a guarantee, but nothing in life is.

Even long-term care insurance is a risky prospect as companies can petition the state to raise your premiums any time their policies are not making sufficient money. These premium increases are regular occurrences and can be extremely large. We believe that self-insuring is safer simply because the decisions are within your own power to make.

At an average annual cost of $93,072, three years of care would cost $279,216. Many needs are much smaller than nursing home care. Additionally, $93,072 is the national average of a year of nursing home care in a semi-private room, which may not necessarily be the best estimate for the accommodation or length of stay. Individuals can customize their standard of care or self-insure for the possibility that both spouses will need care.

Married couples can likely budget the amount for just one person. Often, the first person can be taken care of by the second person with some professional help. After the first spouse passes, the surviving spouse may need institutional care. If you have different desires though, we recommend adjusting your budgeting targets accordingly.

For those who need nursing home care, they need it on average at age 85. This means that the average person should strive to have saved at least $279,216 more than their necessary retirement savings by age 85 to self-insure their long-term care.

Assuming a 3% return over inflation, the earlier that you save these funds, the less you need to save. Setting aside $54,941 at age 30, if it grows at 3% over inflation, should grow to $279,216 in today’s dollars at age 85. The $279,216 will also have grown by inflation, but so will your investments.

You do not literally need to set the money aside. It can live as part of your HSA, IRA, 401(k) plan, or brokerage investments. However, when you are calculating your safe spending amount or are calculating if you are on track for retirement with your savings, you should exclude this amount of money from your calculations.

Step-by-Step Guide

Rather than use national averages, the Genworth study enables you to use specific numbers for the area in which you will seek care.

To calculate the numbers in your area, begin by entering the zip code of the area where you will seek care into the relevant box and click on the name of your area when it displays. This will give you the monthly median costs for various levels of service.

At a minimum, we recommend self-insuring for the cost of nursing home care for one adult for three years. To do this, click the “Annual” button to view costs of 12-months of care, make note of the cost of a semi-private room, and multiply the annual cost by 3.1 for a little more than three years.

In the next step, determine how much you need to have saved today. To do this, you can use our savings targets table below. This table assumes that you will have a 3% real return (after inflation) on the assets between now and age 85.

After tax, have saved more than…	by age…
19.68%	30
22.81%	35
26.44%	40
30.66%	45
35.54%	50
41.20%	55
47.76%	60
55.37%	65
64.19%	70
74.41%	75
86.26%	80
100.00%	85

If you set aside this amount of money and invest it in appreciating securities, your assets have a better chance of seeing you all the way to the end. Saving this amount of money for long-term care insurance should cover 90% of long-term care cases.

Separate from this, we also recommend that you save sufficient assets to pay for your standard of living (annual expenses) from retirement until age 100.

In this way, if you have a serious medical event younger than age 85, you also may not live to be 100 and therefore may not need all of the assets we would otherwise recommend.

For those who have been contributing the maximum to your Health Savings Account (HSA), you can count those HSA funds towards your long-term care needs savings target. For those without an HSA, you can save elsewhere in other accounts.

Retiring with just enough assets for your expenses ignores the important and unexpected expense of healthcare needs. However, saving for them, if done early enough, is not too expensive and helps to protect yourself from this potential financial shock.

In 2022, when I do this calculation for Charlottesville, Virginia, I get that 3.1 years of a semi-private room costs $250,058. If I were working with a 50-year old client, I would multiple by 35.54% to get how much they should have set aside in order to cover this cost by the time they are 85 years old. That would be $88,871. In the 35 years between age 50 and age 85, the $88,871 only requires a 3% real return to grow to cover the $250,058 cost.

Photo by Dan Formsma on Unsplash