{"id":21920,"date":"2024-05-29T00:07:05","date_gmt":"2024-05-29T00:07:05","guid":{"rendered":"https:\/\/www.thinkadvisor.com\/2024\/05\/28\/the-perils-of-self-funding-long-term-care\/"},"modified":"2024-05-29T00:07:05","modified_gmt":"2024-05-29T00:07:05","slug":"the-perils-of-self-funding-long-term-care","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2024\/05\/29\/the-perils-of-self-funding-long-term-care\/","title":{"rendered":"The Perils of Self-Funding Long-Term Care"},"content":{"rendered":"
<\/a><\/div>\n
\n

What You Need to Know<\/h3>\n
    \n
  • Some clients have the self-discipline to lock cash away in ordinary investments.<\/li>\n
  • The portfolio could crash at the worst time.<\/li>\n
  • The need for care could come earlier than expected.<\/li>\n<\/ul>\n<\/div>\n

    Should my client Bob self-fund the long-term care risk or select a hybrid long-term care policy? He\u2019s 67 and does have some health issues.<\/p>\n

    Since he\u2019s an engineer and an accountant, and he\u2019s pursuing his doctorate in AI, I definitely expected insightful questions from him.<\/p>\n

    Sure enough, Bob sent this thought-provoking email: \u201cUsing the $6,500 benefit for four years and assuming the guaranteed rate, my maximum benefit is $563,053. If I invest the one-time premium at 5.59% for 20 years in a high-grade bond, I can get the same amount.\u201d<\/p>\n

    My Initial Thoughts<\/h2>\n

    As long-term care advisors, we know that in a perfect world \u2014 with an accurate crystal ball to predict the future \u2014 it would be great if a client could predict when they will need care.<\/p>\n

    Unfortunately, we cannot depend on that happening.<\/p>\n

    The way I see it, the \u201cself-funding\u201d strategy is susceptible to three big risks:<\/p>\n

      \n
    • A lower-than-expected rate of return.<\/li>\n
    • Higher-than-expected tax rates at claim time.<\/li>\n
    • The inability to attain the 20 years of needed growth to build the \u2018LTC self-fund\u2019 account.<\/li>\n<\/ul>\n

      Any one of the three outcomes \u2014 or even a combination \u2014 and the self-funding strategy may be inadequate.<\/p>\n

      That could leave our clients with the financial dilemma of how to pay the high care costs, which can range from approximately $60,000 a year for home care to over $108,000 for nursing home care.<\/p>\n

      My Next Step<\/h2>\n

      To address Bob\u2019s inquiry and take a closer look at the self-funding risk, I consulted Zack Derryberry, Hybrid LTC Director at ACSIA Partners.<\/p>\n

      We looked at market performance starting in 1995 and how it would have worked for a client if the client had started self-funding 29 years ago.<\/p>\n

      Zack provided this chart to explain a key risk of using investments to fund LTC expenses \u2014 lack of control over timing.<\/p>\n

      \"A<\/figure>\n

      We used Joan as our example.<\/p>\n

        \n
      • In 1995, at age 65, she decides to use investments to self-fund her future LTC costs.<\/li>\n
      • From 1995 to 2000, her strategy appears to be prudent. The S&P 500 (the blue line on the left side of the chart) soars, increasing her portfolio (the green line on the left).<\/li>\n
      • However, the decade of 2000 to 2010, with natural market functioning, brings volatility.<\/li>\n
      • Unfortunately, Joan experiences two LTC events (orange circles).<\/li>\n<\/ul>\n

        The first LTC event is at age 73, and the second LTC event is at age 79.<\/p>\n

        Takeaway: Joan looked great for five years.<\/p>\n

        However, because her planning is sensitive to the market, she now has far less savings than anticipated to cover costs.<\/p>\n

        And, in 2009, when she needed care at age 79, she had only about the same amount of money she had in 1995, due to market downturns (the red line.)<\/p>\n

        Clients like Bob who hope to fund their LTC costs with a portfolio of fixed-rate bonds may also face the types of investment risk associated with bonds, such as default risk, call risk and asset-liability matching problems.<\/p>\n

        The Risks of Timing<\/h2>\n

        Zack explains, \u201cSince you can\u2019t predict when you\u2019ll suffer a change in health which results in suffering long-term care expenses, a period of market decline could leave you susceptible to insufficient funding for LTC expense.\u201d<\/p>\n

        This kind of financial shortfall defeats the purpose of self-funding.<\/p>\n

        The fluctuating value of your client\u2019s accounts \u2014 a common market occurrence \u2014 and a lack of control over the timing of a long-term care event \u2014 could leave your client ill-prepared and even in financial difficulty.<\/p>\n","protected":false},"excerpt":{"rendered":"

        What You Need to Know Some clients have the self-discipline to lock cash away in ordinary investments. The portfolio could crash at the worst time. The need for care could come earlier than expected....<\/p>\n","protected":false},"author":1,"featured_media":21921,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[1],"jetpack_featured_media_url":"https:\/\/blog.lifeinsurance-orleans.ca\/wp-content\/uploads\/2024\/05\/the-perils-of-self-funding-long-term-care.png","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/21920"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=21920"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/21920\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media\/21921"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=21920"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=21920"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=21920"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}