Is Self-Funding Long-Term Care Really Cheaper Than Insurance?

Is Self-Funding Long-Term Care Really Cheaper Than Insurance?

In this episode of LTCiNow, the discussion explains why self-funding long-term care can cost far more than most families expect. The real cost is not just the money withdrawn from savings, but also the lost future income, possible tax consequences, and higher Medicare Part B premiums that can follow. For many pre-retirees and adult children, long-term care insurance may protect far more of a family’s retirement plan than simply “paying out of pocket.”

Many Americans assume that if they have enough retirement savings, they can simply self-fund long-term care later. On the surface, that sounds reasonable. But in this episode of LTCiNow, Scott Olson explains why that strategy can create a chain reaction of financial damage that many people never fully consider. The central point is simple: paying for care from investments does not just reduce the account balance. It also reduces the future income those assets could have generated for the rest of a person’s life, and possibly for a spouse’s life as well. That is one of the hidden costs of self-funding long-term care.

The Breakdown: What Is the Hidden Cost of Self-Funding Long-Term Care?

In this episode of LTCiNow, the answer is clear: self-funding long-term care often costs more than the care bill itself. That is because families may lose:

1. The asset used to pay for care
2. The future investment income that asset would have produced
3. Potential tax efficiency
4. Protection against market downturns at the exact wrong time

To illustrate the point, the episode uses an example of a couple, Michael and Lisa, who chose to self-insure because they had a seven-figure retirement portfolio. The example assumes a $100,000 annual care cost and an 8% average annual investment return. Under that scenario, every withdrawal for care permanently reduces future income.

By year five, the portfolio is not just down by $500,000. Lisa is also living with $40,000 less annual investment income because that money is no longer invested. If Lisa lives 10 years longer than Michael, the total impact can exceed $1 million when both the withdrawals and lost income are considered.

Why Self-Funding Long-Term Care May Trigger Additional Costs

Self-Funding Long-Term Care can create side effects beyond the direct care bill. These hidden costs may include:

1. Lost retirement income

Once assets are sold to pay for care, they are no longer producing income or growth. This can permanently weaken a retirement plan, especially for the surviving spouse.

2. Higher income taxes

If care is paid from a traditional IRA or a similar tax-deferred account, families may need to withdraw more than the cost of care itself. A couple in a combined 35% tax bracket may need to withdraw more than $150,000 just to net $100,000 for care.

3. Higher Medicare Part B premiums

Larger withdrawals from retirement accounts can increase modified adjusted gross income, which may raise Medicare Part B premiums.

4. Down-Market risk

One of the strongest arguments against Self-Funding Long-Term Care appears when care begins during a market decline. This is even riskier than the normal sequence-of-returns risk, because a family may be forced to sell investments when values are depressed. In the transcript’s example, a 15% market correction can magnify the true cost of paying for care.

The point is that Self-Funding Long-Term Care can make that risk worse. Families may need large withdrawals at exactly the wrong time, locking in losses and reducing the portfolio’s ability to recover.

Expert Opinions: Key Insights From the Episode

• Self-Funding Long-Term Care is not just a spending strategy. It is also a decision that can erase future income from retirement assets.
• The financial damage may continue long after the care event ends. In the example, Lisa continues living with a permanently reduced income after Michael dies.
• Taxes and Medicare premium increases can make self-funding even more expensive than families expect.
• Long-term care insurance may help preserve invested assets during a down market.

Why Long-Term Care Insurance May Be More Efficient Than Self-Funding Long-Term Care

Tax-free long-term care insurance may be a more efficient planning tool than Self-Funding Long-Term Care. Some policy premiums may be deductible for business owners or those using a Health Savings Account, while qualified long-term care insurance benefits are generally received tax-free.

That matters because insurance may help:

• preserve retirement savings
• reduce the need for large taxable withdrawals
• protect a spouse’s future income
• avoid selling investments in a bad market

For families comparing options, the real question is not just, “Can the money pay for care?” The better question is, “What does paying for care do to the rest of the retirement plan?” That is the real issue behind Self-Funding Long-Term Care.