One of the most common objections I hear from affluent clients regarding long-term care insurance is simple:
“I can afford to pay for care myself.”
For many people, that’s absolutely true.
But I think there’s a better question.
Should you?
Just because you have enough assets to pay for long-term care doesn’t necessarily mean self-funding is the most efficient strategy. More often than not, the decision to self-fund is made because clients don’t want to think about the possibility of needing care in the first place. The conversation becomes focused solely on how care would be paid for, instead of whether the funding strategy itself is the best one.
Those are two very different questions.
Ideally, every client would transfer as much of this risk as possible through a comprehensive long-term care insurance solution.
When that makes sense financially and medically, it’s often the cleanest answer.
But many affluent clients either don’t want to pay ongoing premiums, don’t qualify medically, or simply decide they would rather retain control of their assets.
This article isn’t an argument against traditional long-term care insurance – it’s about making better planning decisions when full coverage isn’t the path a client chooses.
The Reality of Long-Term Care
The statistics are difficult to ignore.
According to the U.S. Department of Health and Human Services, approximately 70% of people turning age 65 today will require some form of long-term care during their lifetime. Some may only need assistance for a short period following an illness or surgery. Others may require care for several years because of dementia, Parkinson’s disease, stroke, or simple frailty that comes with aging 1
Yet one of the biggest misconceptions I continue to hear is:
“Medicare will cover it.”
Unfortunately, that’s usually not the case.
Medicare is designed to cover medical treatment, not custodial long-term care. It may pay for up to 100 days of skilled nursing facility care following a qualifying hospital stay, and even then only if very specific requirements are met. After that, the responsibility generally falls on the individual.2
For someone needing several years of assisted living, home health care, or memory care, Medicare simply isn’t the solution many people assume it is.
What Self-Funding Can Actually Look Like
A Wall Street Journal article provides a striking example of what this can look like in the real world.
Violet Carson was 78 when her husband died. She had Parkinson’s disease, Lewy body dementia, and required around-the-clock care. Her children believed she might live for only another year.
Instead, she lived for roughly another decade.
By the time she died at age 88, her family had spent more than $1.3 million providing care for her at home.3
Fortunately, Violet and her husband had accumulated enough assets that the family was able to absorb the cost without going into debt. They were exactly the type of affluent family many people point to when they say, “I’ll just self-fund.”
They could afford the care.
But that brings us back to the question at the beginning of this article:
Just because they could afford to self-fund, was that necessarily the most efficient way to do it?
The most difficult part of long-term care planning is that the expense is not defined simply by the monthly cost of care. It is also defined by how long care lasts.
A client may be comfortable absorbing $10,000 or $12,000 per month for a year or two. Ten years is an entirely different financial event.
And even the $1.3 million spent on care may not represent the family’s true economic cost.
That’s where I think most clients stop their analysis.
They calculate the cost of care.
They don’t calculate the cost of paying for care.
To understand that, we also have to consider which assets were liquidated, what taxes were triggered, and how much future growth was lost along the way.
The Hidden Cost of Self-Funding
When clients tell me they’re going to self-fund long-term care, I ask one simple question.
Which assets are you planning to use?
More often than not, they’ve never thought that far ahead.
Most people think the cost of care is simply the monthly bill from the facility or caregiver.
It isn’t.
The real cost depends on where the money comes from.
Consider a few common scenarios.
Qualified Retirement Accounts
For many Americans, the majority of their wealth is held inside traditional IRAs or qualified retirement plans.
Every dollar withdrawn from those accounts to pay for care is generally taxed as ordinary income. Depending on the client’s tax bracket and state of residence, generating $100,000 to pay for care may require substantially more than a $100,000 withdrawal.
Deferred Annuities
Another common answer is:
“I’ll just use my annuity.”
That can work—but many people overlook the tax treatment.
Deferred annuities generally receive last-in, first-out (LIFO) tax treatment, meaning earnings are withdrawn first and taxed as ordinary income until all gains have been distributed.
Again, the cost isn’t simply the care itself.
It’s the taxes required to generate the money needed to pay for it.
Taxable Investments
Even brokerage accounts can create unexpected costs.
Liquidating appreciated securities may trigger capital gains taxes, particularly if large withdrawals are required over multiple years.
And in every case, increased taxable income can create additional ripple effects, including higher Medicare premiums, greater taxation of Social Security benefits, and movement into higher marginal tax brackets.
Suddenly, a $12,000 monthly care bill isn’t really a $12,000 expense.
It’s the care…
plus the taxes required to create the cash flow.
“Can’t I Just Deduct the Cost of Care?”
Maybe.
Maybe not.
Medical expense deductions are more complicated than many people realize.
Certain long-term care expenses may qualify as deductible medical expenses, but not every cost does. For example, portions of assisted living expenses may not qualify unless specific IRS requirements are met. Even when expenses are deductible, they must exceed the applicable IRS adjusted gross income threshold before providing a tax benefit, and the taxpayer must itemize deductions.4
In other words, counting on a tax deduction to offset the cost of self-funding isn’t always as straightforward as it sounds.
Self-Funding Can Still Be the Right Answer
None of this is meant to suggest that affluent clients should never self-fund long-term care.
In many cases, it’s a perfectly reasonable decision.
But it should be an intentional decision—not simply an assumption.
If self-funding truly is the best approach, then it deserves the same level of planning as every other major financial decision.
Which assets will be used first?
Can taxes be minimized?
Should highly appreciated assets be preserved?
Would repositioning certain assets today reduce future tax exposure?
Could a hybrid insurance solution provide leverage that ultimately costs less than paying entirely out of pocket?
These are planning questions—not product questions.
The Stop-Gap Strategy: A Smarter Way to Self-Insure
If a client isn’t going to fully insure the risk, that doesn’t mean the only remaining option is to self-fund every dollar.
This is where a stop-gap strategy can make a tremendous amount of sense.
Instead of hoping for the best—or systematically liquidating assets during retirement—a small portion of the estate can be repositioned into an annuity specifically designed to provide long-term care benefits while allowing the underlying value to continue growing.
Unlike self-funding, where taxes may be triggered every time assets are sold, every dollar paid from the long-term care benefit is generally received income tax-free.
Just as importantly, fewer taxable assets may need to be liquidated in the first place.
Here’s what that might look like.
Assume a client repositions $100,000 from a $1,000,000 estate into a long-term care annuity.
The annuity earns a non-guaranteed 6%, with a small charge for the LTC rider.
Immediately, the client creates approximately $300,000 of long-term care coverage payable over six years.
At the end of year one, the cash value has still grown approximately 4.27% net of rider charges, preserving the original premium while continuing to participate in future growth.
At first glance, $300,000 of coverage may not sound like much compared to a potential $1.3 million long-term care event like what happened to the Carsons.
But that’s looking at the wrong number.
The goal isn’t to insure every dollar.
The goal is to keep the estate from being forced to fund every dollar.
Looking at a 60-year-old male who experiences a claim beginning at age 80:
- $9,608 per month of tax-free long-term care benefits
- $807,802 of total long-term care benefits
- Coverage that absorbs nearly all of a $10,000 monthly care bill
More importantly, the remaining estate continues to do what it was designed to do:
Continue Compounding.
Instead of liquidating IRA assets, realizing capital gains, or selling investments during a market downturn, those assets remain invested while the stop-gap strategy shoulders much of the long-term care expense.
The result?
Nearly $1 million more remaining in the estate by life expectancy compared to self-funding under the assumptions illustrated.
That’s the power of protecting compounding instead of interrupting it.
(See illustration below.)
Why This Approach Works
For many clients, a comprehensive long-term care insurance policy remains the ideal solution because it transfers substantially more of the risk to an insurance company.
But not every client wants to make that commitment.
In those situations, a stop-gap strategy can bridge the gap between doing nothing and fully insuring the risk.
The money remains part of the estate.
It continues to earn interest.
It remains accessible.
But it also provides meaningful leverage against one of the largest financial risks facing retirees.
For clients who balk at the cost of traditional long-term care insurance, this reframes the conversation.
It isn’t about buying insurance.
It’s about creating a more efficient funding strategy.
The Question That Changes the Conversation
Before a client decides to self-fund long-term care, I ask one simple question:
“Have you thought about which assets you’ll use to pay for it?”
It’s amazing how often the answer is no.
Once you begin discussing taxes, liquidation order, market timing, and the impact on a surviving spouse or heirs, the conversation changes.
Sometimes the conclusion is still to self-fund.
But almost never is the best strategy simply, “We’ll figure it out if it happens.”
Long-term care planning isn’t really about whether you can afford care.
It’s about whether you’ve designed the most efficient way to pay for it
If you’d like to see how this strategy compares to traditional self-funding using your own client’s assumptions, I’d be happy to walk through a real-world illustration together.
- https://acl.gov/ltc/basic-needs/how-much-care-will-you-need ↩︎
- https://www.medicare.gov/coverage/skilled-nursing-facility-care ↩︎
- https://www.wsj.com/articles/we-thought-within-a-year-she-would-be-gone-when-moms-care-costs-over-1-million-3b13f037?mod=hp_featst_pos4 ↩︎
- https://www.irs.gov/publications/p502 ↩︎