Evaluating Long-Term Care Funding Options: Insurance vs Self-Funding

Why this decision matters now

Many people underestimate how likely and how expensive long-term care (LTC) can be. Federal resources note that nearly 70% of people who reach age 65 will need some form of long-term services and supports during their lives (LongTermCare.gov). The way you fund that care affects whether you preserve retirement income, protect your estate for heirs, or rely on public programs such as Medicaid.

In my practice working with clients for more than 15 years, I regularly see two patterns: households that overestimate how much they can self-fund and underinsure, and those who buy inappropriate policies without comparing coverage details. The right choice depends on personal health, family history, assets, risk tolerance and state rules.

Key facts to know up front

• Likelihood of need: LongTermCare.gov reports that almost 70% of people who reach 65 will need some LTC services in their remaining lifetime.
• Cost variability: LTC costs vary by care type (in-home aide, assisted living, nursing home) and location; in many U.S. markets, nursing home care can exceed $100,000 per year (industry surveys such as Genworth’s Cost of Care Survey track regional rates).
• Medicare coverage: Medicare generally does not pay for custodial long-term care. Medicaid pays for long-term nursing home care for eligible low-income individuals but requires strict asset and income rules and may include a lookback period.

Sources: LongTermCare.gov; National Association of Insurance Commissioners (NAIC); state Medicaid offices.

How long-term care insurance (LTCI) works and what to watch for

LTCI is designed to transfer the financial risk of extended care from you to an insurer in exchange for premiums. Typical policy features to compare:

• Elimination period (like a deductible measured in days)
• Daily or monthly benefit amount
• Benefit period (years or lifetime)
• Inflation protection (important because LTC costs rise faster than general inflation)
• Activities of Daily Living (ADL) triggers or cognitive impairment for claims
• Nonforfeiture benefits or return-of-premium riders

Pros: predictable potential coverage, reduces risk of depleting retirement assets, preserves choices of care.
Cons: premiums can be expensive and tend to rise for older buyers; underwriting can exclude people with preexisting conditions; complexity means benefit limits and exclusions matter.

NAIC and state insurance departments provide consumer guides and complaint histories that are useful when evaluating carriers.

Self-funding: strategies, pros and cons

Self-funding means you plan to pay LTC costs from personal savings, investments, home equity, or family support. Common self-funding tactics include:

• Creating a dedicated LTC savings bucket or rainy-day fund
• Using laddered taxable investments and a cash cushion for near-term care
• Selling or downsizing home equity when care begins
• Purchasing short-term care riders or smaller policies to cover early costs

Pros: greater control and flexibility; no premiums to lose if care isn’t needed; potential access to higher-end care options at first.
Cons: risk of asset depletion, tax and spousal protection issues, and the potential for catastrophic long-term costs that quickly erode retirement security.

Example framework for evaluating self-funding capacity:

1. Estimate likely annual LTC need in your area for chosen care settings (home health aide, assisted living, nursing home).
2. Determine how many years of care you’re comfortable funding from assets without compromising retirement (e.g., 1–3 years vs. indefinite).
3. Stress-test your plan for longevity, inflation (use a 3–5% LTC inflation assumption), and sequence-of-returns risks.

Hybrid policies and alternatives

Hybrid options combine life insurance or annuities with long-term care benefits. They can be attractive for those who dislike ‘use-it-or-lose-it’ traditional LTCI because they offer death benefits or a return of premium if LTC isn’t used. Considerations:

• Typically more expensive upfront than a life-only policy but can be more effective at preserving value to heirs.
• Policy design varies—confirm how LTC benefits reduce life benefit and how premiums are treated.

For people with health issues who fail traditional underwriting, hybrids sometimes offer easier access to benefits. See FinHelp’s guide on catastrophic approaches and hybrid solutions for deeper examples: Catastrophic Long-Term Care Planning: Hybrid Insurance and Savings Solutions.

Medicaid, spend-down and lookback rules (short primer)

Medicaid can cover long-term nursing home care for eligible low-income individuals, but qualifying requires meeting strict asset and income rules and often a lookback period where asset transfers are reviewed. If Medicaid is part of your safety net, plan early and consult a specialist for lawful Medicaid planning. FinHelp’s article on Medicaid rules explains lookback implications in detail: Medicaid Lookback and Long-Term Care Planning Explained.

How to evaluate insurance vs self-funding — practical checklist

1. Inventory resources: list liquid assets, retirement accounts, home equity (remember tax and penalty rules for retirement account withdrawals), and potential family support.
2. Project care needs: estimate type of care, regional costs, and duration scenarios (short: 1–3 yrs; medium: 3–7 yrs; long: 8+ yrs). Use conservative inflation assumptions.
3. Run a break-even scenario: compare cumulative premiums paid (plus expected investment returns if those premiums had been invested) against projected out-of-pocket care costs under self-funding.
4. Evaluate policy specifics: elimination period, daily benefit, inflation rider, benefit period, exclusions, and carrier financial strength.
5. Consider hybrid or partial solutions: small traditional policy + self-fund initial years; hybrid life/LTC product to protect heirs; or annuities with LTC riders for guaranteed income.
6. Tax and estate implications: check if premiums are deductible in your situation (see IRS Pub. 502) and how benefits are taxed. For specific forms and tax handling, see FinHelp’s references on long-term care tax forms: Form 1099-LTC — Long-Term Care and Accelerated Death Benefits.

Scenario illustrations (simplified)

• Conservative saver with $1M in investable assets, good health: may choose to self-fund the first several years while reserving a hybrid policy to protect against catastrophic, multi-year care.
• Couple in 50s with limited savings but stable income: could favor buying traditional LTCI earlier to lock lower premiums and preserve retirement assets.
• Individual with chronic conditions and limited insurability: explore hybrid or life-with-LTC riders, and plan Medicaid eligibility carefully.

These are illustrative. I run these scenario types with clients to show trade-offs rather than prescribe a single solution.

Red flags and buyer cautions

• Vague or missing inflation protection: without it, a policy’s benefit can become insufficient over time.
• Lifetime benefit limits too low for your market.
• Carrier with weak financial ratings for long-term obligations.
• Sellers pushing immediate large commissions or complex replacements without side-by-side comparisons.

Always get written policy illustrations and comparison spreadsheets before committing.

Decision tools and where to get help

• Use cost-of-care calculators from LongTermCare.gov and independent surveys for regional pricing.
• Consult a fee-only financial planner or elder law attorney for Medicaid and estate implications. Insurance agents can quote products; fiduciary advisors help align product choice with broader retirement planning.
• Compare multiple carriers and request guaranteed renewal and nonforfeiture options in writing.

For timing guidance and planning checkpoints, see our article: When to Consider Long-Term Care Planning in Your 50s.

Frequently asked (short) answers

• Will Medicare pay for long-term care? No—Medicare generally does not cover custodial LTC care (LongTermCare.gov).
• Is LTC insurance worth it? It depends on your assets, health, family situation and risk tolerance. Use the checklist above to weigh options.
• Are premiums refundable? Some carriers offer return-of-premium or nonforfeiture riders; hybrid contracts return value through death benefits.

Final recommendations (practical next steps)

1. Gather account balances, current health status documentation and family health history.
2. Run a 3-scenario projection (best, likely, catastrophic) for LTC costs and compare to your liquid resources.
3. If leaning toward insurance, get at least three quotes and a policy comparison showing inflation protection and benefit triggers.
4. If self-funding, set up a dedicated LTC reserve, update your retirement cash-flow plan and include contingency plans for asset liquidation or family caregiving.

Professional disclaimer and sources

This article is educational only and not personalized financial, tax or legal advice. Consult a qualified financial planner, insurance specialist and elder-law attorney before making decisions.

Sources and further reading

• LongTermCare.gov (U.S. Dept. of Health and Human Services) — guidance on need and care types.
• National Association of Insurance Commissioners (NAIC) — consumer guides and model regulations.
• Genworth Cost of Care Survey — regional cost data (industry reference).
• FinHelp glossary entries: “Long-Term Care Planning and Funding Options”, “Medicaid Lookback and Long-Term Care Planning Explained”, and “When to Consider Long-Term Care Planning in Your 50s.”