Insure It, Invest It, or Both? How to Compare Your Options for Paying for Long-Term Care
Insurance swaps an unknown, possibly large cost for a known premium, and some policies pay a death benefit if you never need care. Saving instead keeps the money yours but leaves you exposed if care costs more or lasts longer than you set aside. Many people combine both.
What are you really deciding?
Whether to pay a premium to move the risk of long-term care costs to an insurer, to set money aside and carry that risk yourself, or to do some of each. None of these is right for everyone.
How likely is it you’ll need care, and for how long?
The Administration for Community Living reports that someone turning 65 today has almost a 70% chance of needing some long-term care services. About one-third may never need them, but about 20% will need them for longer than five years. On average, women need care for 3.7 years and men for 2.2. (LongTermCare.gov) Other studies report different figures, but the pattern is the same: the range is wide.
Costs are meaningful and tend to rise over time. See How Much Does Long-Term Care Cost?.
That wide range is the heart of the decision. The long, costly cases are the ones that can overwhelm savings, and they’re the ones insurance is designed to address.
Option 1: What if you set money aside?
- It stays flexible, and anything you don’t spend is yours or your heirs’.
- The amount you’d need can’t be known in advance. It depends on how long care lasts, the level of care, where you live, and how much costs rise.
- Your pool has to keep pace with rising costs, and a market drop at the wrong time can hurt.
- It takes years to build, so care that starts early may arrive before the pool is ready.
Option 2: What if you insure?
You pay a premium, and the insurer takes on the risk of a long or costly need. The policy sets a monthly benefit and a benefit period.
- A benefit pool from the start. Once you’re approved and the policy is in force, the benefit is there. If care begins early, you aren’t waiting to build a pool.
- A benefit that grows. With inflation protection, the benefit increases each year, whether or not you’ve used it. With the coverage we offer, the options are 3% simple, 3% compound, and 5% compound. Savings grow only through contributions and returns, and safe investments may not keep pace with rising care costs. See How Inflation Protection Works in Long-Term Care Insurance.
- If care starts sooner than expected, the benefit available can be much larger than what the same premiums could have built if saved and invested. Premiums buy a defined benefit pool, not an account balance.
- What happens if you never need care depends on the type of policy. A traditional policy generally returns nothing, a hybrid life policy typically pays a death benefit to your beneficiaries, and an annuity-based policy leaves you the annuity’s value, subject to its terms. Using long-term care benefits reduces a hybrid’s death benefit, and some policies, including the coverage we offer, guarantee a minimum. See How Does Long-Term Care Insurance Work? and What Happens If I Never Need Long-Term Care?.
- It can protect other savings, so they stay available for other goals.
What to weigh
- Premiums are a real cost, and you may pay for years without using the coverage.
- You have to qualify medically. See What to Expect in Long-Term Care Insurance Underwriting.
- Benefits have limits, and a very long need can exceed them.
- A death benefit isn’t a refund of what you paid, and it isn’t guaranteed to exceed your premiums.
- The NAIC notes that a traditional stand-alone policy can cost much less than a hybrid for similar benefits. (NAIC Shopper’s Guide)
How do the two grow over time?
A policy’s benefit grows by the inflation option you choose. Savings grow only through what you add and what it earns. A fair comparison depends on your timeline, how much you’d save, what it would earn, how fast care costs rise, and how your policy’s benefit grows. That’s why a single headline example would mislead. Ask an agent for a personalized illustration, and remember that illustrations aren’t guarantees.
What if you need care sooner than expected?
A self-funded pool may not be built yet. A policy that’s in force has a benefit pool from the start, and it grows with the inflation option you choose. Policies differ on what happens if you stop paying and whether premiums are waived while benefits are paid, so confirm the wording before you buy. A health change can also end your ability to qualify. See When Should You Buy Long-Term Care Insurance?.
What about taxes?
Premiums, benefits, and withdrawals are each taxed differently, and hybrid products add their own rules. For tax-qualified policies, premiums may count toward the medical expense deduction, subject to age-based limits, and benefits are generally tax-free up to federal limits. Withdrawals from pre-tax accounts are taxable income. A tax advisor can explain how this applies to you. See What Is a Tax-Qualified Long-Term Care Insurance Policy?.
If you’re a couple
Compare one shared policy with two individual ones. Each person is underwritten individually, so one of you may not qualify. See Long-Term Care Insurance for Couples and Growing Old Together.
Or both
Many people insure a baseline, such as the first few years of care, and set money aside for inflation, higher costs, and anything beyond the benefit period.
Questions that help you decide
- How big a hit could I absorb without changing my plans?
- Would I rather carry this risk or pay to move it?
- How much do I value money staying mine versus a protected outcome?
- What would I need to set aside to match a given benefit pool, and how would that change if care started early?
- What would be returned if I never use the coverage?
When might insurance not fit?
The NAIC advises against buying if you can’t afford the premiums, don’t have many assets, rely only on Social Security or SSI, or are on Medicaid. It also offers a rule of thumb that a policy may be unaffordable if premiums would be more than about 7% of your income. (NAIC Shopper’s Guide)
Staying Power is a licensed insurance agency that helps people decide whether long-term care coverage fits their plan.
Get started to see what care costs and how to fund it.
Frequently asked questions
Is long-term care insurance better than saving for care?
Neither is better for everyone. Insurance moves the risk of a long or costly need to an insurer for a known premium, while saving keeps the money yours but leaves you exposed if care costs more or lasts longer than you saved. Many people combine both.
Does long-term care insurance beat investment returns?
They aren’t the same kind of thing. Insurance isn’t an investment. A policy buys a defined benefit pool, and how it compares with savings depends on your timeline, premiums, returns, and when care starts. Ask for a personalized illustration.
What if I never need long-term care?
It depends on the policy type. A traditional policy generally returns nothing, while a hybrid life policy typically pays a death benefit to your beneficiaries. See the article on what happens if you never need care.
