As we grow older, the prospect of needing long-term care becomes more and more of a reality. For starters, there is about a 70% chance that today’s 65-year-olds will require long-term care services and support during their remaining years, according to the Administration for Community Living (ACL). And, statistics also show that women need care for longer — 3.7 years on average — compared to men (2.2 years).
It’s a topic many of us would rather not think about, but it’s essential to plan for the possibility of requiring assistance with daily activities as we age. And, two common ways to cover the costs of long-term care are throughor self-funding. When you self-fund, you pay for the cost of long-term care out of pocket, and when you purchase a , it helps to cover those types of expenses.
But these two options are extremely different, and it’s important to know which one makes the most sense. Otherwise, you could end up in serious financial trouble during retirement.
Long-term care insurance vs. self-funding: What’s the right choice for you?
The key considerations to help you make an informed decision that best suits your needs and financial situation include:
Long-term care insurance
Long-term care insurance is a dedicated policy designed to cover the costs of services required for chronic illnesses, disabilities or prolonged health issues that prevent you from performing essential activities of daily living. Here are some factors to consider when determining whether this type of policy:
- Financial protection: Long-term care insurance can provide valuable financial protection by covering the high costs associated with long-term care services, such as nursing home, assisted living or in-home care.
- Premiums: Premiums for long-term care insurance , and they tend to rise as you age. Purchasing this type of insurance at a younger age can help lock in lower rates.
- Eligibility: To qualify for some types of long-term care insurance, you may need to meet certain health criteria. Pre-existing conditions can make it difficult or expensive to obtain coverage, so factor that into your decision-making process (but don’t let it drive your decision completely; you may still be able to find an affordable policy by shopping around).
- Benefits: , so it’s essential to carefully read and understand the benefits, limitations and waiting periods associated with your chosen long-term care insurance plan. That way you’ll know whether the coverage aligns with your specific needs (or whether it makes more sense to self-insure).
- Tax deductions: Some premiums may be tax-deductible, potentially offering a tax advantage in certain situations. That can be a pretty big benefit of opting for long-term care insurance, especially if you’re on a tight budget.
Self-funding long-term care means that you plan to cover the costs out of your own financial resources, which can include savings, investments and other assets. Here are some important factors to consider when weighing whether self-funding is the right move for your finances:
- Control: Self-funding allows you to retain control over your assets and how they are used for your long-term care needs. That said, having control in this manner can be a big perk for some people — but a big headache for others.
- Risk: Self-funding carries the risk of depleting your savings and assets quickly if you require extended care. This can impact your financial security and the legacy you leave behind for your loved ones, so you’ll need to consider this factor when weighing your options.
- Planning: To self-fund effectively, you need to have a comprehensive financial plan in place that considers the potential costs of long-term care and how they will be covered. This can take time and effort — and if anything goes wrong or there are unexpected expenses that arise in the future, it could become a major issue.
Choosing the right option for you
The right choice between long-term care insurance and self-funding depends on your individual circumstances and preferences. Before making a decision, it may help to:
Assess your finances
When weighing both options, take a close — and honest — look at your financial situation, including your income, savings, investments and other assets. This will help you determine whether you can comfortably self-fund or if insurance is a more practical choice.
Consider your health and family history
It can also help to consider your current health and family history during this process. If you have a history of chronic health issues, long-term care insurance may be a more secure option. But don’t rely on just this factor to make a decision; while you and your family’s health history can be a good starting place, it’s important to plan for the what-ifs, too.
Weigh the premium costs
Get quotes for long-term care insurance to understand the costs and weigh them against your ability to self-fund. Start early to secure more affordable premiums — as the cost of a long-term care insurance policy depends heavily on the age you are when you purchase it.
Get legal and financial advice
It may also help to consult with financial planners, insurance agents and elder law attorneys to make an informed decision that aligns with your financial and legal needs.
The bottom line
Planning for long-term care is an essential part of retirement and financial security. And, while you have a couple of options for funding long-term care if you need it, both long-term care insurance and self-funding both have their advantages and drawbacks to consider during the process. Ultimately, the right choice for you depends on your unique situation and preferences. And, regardless of your decision, addressing this issue now will provide you with peace of mind and a solid plan for your future well-being.