Common Mistakes People Make with Self-Insuring
Self-insuring long-term care costs is a risky proposition in many ways. Many people believe self-insuring long-term care costs is an alternative, yet few would consider self-insuring their home, health, or auto. However, during retirement, the risk and cost from a long-term care situation is higher than all those other risks combined. If you don’t have a plan in place, then your default plan is self-insuring which can expose all your income and assets to pay for care. Please consider the following:
Not understanding the true costs of a lengthy care situation is often the reason many individuals and their advisors will not put a long-term care plan in place. Although costs will vary depending on the amount and level of care being provided, many people are simply not aware or prepared for the expenses that can come from a prolonged care situation. Many cognitive situations will last for years, requiring specialized care services which will be be quite expensive and can devastate the best savings plans.
Income vs. Assets
Income pays expenses, not assets. Many individuals often assume because they have assets they will be able to afford to pay for their long-term care expenses. However, often overlooked are the many problems that come from trying to convert assets into income. Taxes and market timing will have a direct effect on converting assets to income. Personal and emotional consequences are often overlooked as well. Think of the issues of having to sell a family home or business in order to generate the needed income due to an unexpected care need.
Not Understanding Options
Many who self-insure do so not understanding the many options that are now available. Recent changes to the Pension Protection Act have made it beneficial to use a current portion of your existing savings to protect the rest of your assets by setting up a leveraged plan. Not only will you guarantee a tax-free amount of coverage, you will not pay taxes on the accumulation of the policy. Many plans available guarantee a full return of premium (all years) should you not use it for long-term care or decide to cancel the policy. These programs also guarantee an amount of coverage that will be available at a future date regardless of current market condition. A properly structured plan also provides all income from the plan tax-free. Because of the many funding options, individuals can now use a wide variety of sources to fund a plan including; savings, CDs, existing annuities, cash value in life insurance contracts, retirement funds, or even home equity. By setting up an approved plan, you will save taxes, protect your portfolio, and not be subjected to an unlimited amount of risk that comes with self-insuring… and you will have access to any money you put into your plan should you need it for other reasons.